The UK government is facing fresh calls to regulate umbrella companies, following the revelation that one non-compliant firm will avoid paying back millions of pounds it owes to HMRC in unpaid tax by undertaking a pre-pack administration.
Umbrella firm Exchequer Solutions went into administration on 15 July 2024 with an outstanding unpaid tax liability of more than £15m, with a Companies House filing confirming the company and its assets were sold to a “connected party” as part of a pre-pack administration deal the same day.
The connected party is a company called Exchequer Contracts, which was set up in July 2022 and shares a director with Exchequer Solutions. The latter is also described as being the parent company to Exchequer Contracts in its 2023 financial report.
Details of the pre-pack process, overseen by insolvency practitioner Leonard Curtis, feature in an administrator’s report document, published on Companies House on 4 September 2024.
The document confirms that Exchequer Solutions went into administration with just under £7.5m available to repay its creditors, which includes HMRC, meaning the government tax agency is unlikely to receive the full amount of unpaid tax it is owed.
The document also states that none of the firm’s creditors were consulted on the pre-pack administration plan, out of concern it could prompt them to step up efforts to reclaim any monies owed.
“It was considered that to consult with [the] general body of creditors, including HMRC, prior to the administration could have resulted in creditors accelerating any legal processes, or ceasing providing services or customers terminating work,” the document stated. “This would have negatively impacted on the value achieved for the company’s assets, and had an adverse impact on the continuation of trade and the likelihood of a going concern sale.”
Misalignment between legislation and law
Speaking to Computer Weekly, former credit services director Eddie Pacey said the case neatly highlights a misalignment between UK tax legislation and the laws governing how companies operate.
“[It] just goes to show how much company law and indeed insolvency law needs a massive shake-up,” he said. “It is quite staggering how much HMRC loses under current rules and why it remains so easy for directors to manipulate and hide behind limited liability.”
Computer Weekly contacted HMRC for input on this story, but was told the organisation is unable to comment on individual cases. A representative from Leonard Curtis also declined to comment on the story.
Speaking to Computer Weekly, tax consultant Ray McCann said that – despite its no-comment stance – HMRC will be working hard behind the scenes to recoup the money it is owed.
“I would expect HMRC to be considering all of the options available given the amounts involved and the fact that the directors are continuing, albeit under a new company name,” he said.
Looking back over the administration
HMRC’s investigation into Exchequer Solutions began in 2015, and focused on the way the company treated for tax the expenses paid out to the contractors on its books.
As detailed in an administrator’s report, the company was of the view that its contractors did not need to pay income tax or National Insurance contributions (NICs) on any expenses they claimed for.
“The umbrella product involved employing the individual completing the work rather than engaging them on a self-employed basis,” the report stated. “Once the worker was employed, the company understood that the worker was continually employed via an over-arching contract of employment and that each of the assignments they completed was at a temporary workplace.”
The document continued: “It was considered that the worker could therefore be reimbursed their expenses, such as mileage and subsistence alongside their salary for work undertaken. As a result, there was no PAYE [Pay As You Earn] or NIC deducted on the expenses claimed.”
According to the administrator’s report, Exchequer Solutions consulted with an unnamed “professional advisor” in 2010 to ensure the umbrella services it offered were being delivered compliantly.
“The [professional advisor] advised the company that there was a sufficient over-arching contract of employment between it and its works in respect of the umbrella services and that, as a consequence, workers were entitled to treat the reimbursement of travel and subsistence expenses as free from PAYE or NIC deductions,” the document stated.
“The company continued to engage the [professional advisor] to provide advice on any queries that arose and conduct period audits to confirm that the company was operating compliantly.”
Unpaid taxes
In October 2015, HMRC launched an investigation into Exchequer Solutions’ expense-processing methods and concluded the company owed it £11.9m in unpaid income tax and NICs.
Exchequer Solutions unsuccessfully tried to appeal against HMRC’s claim, in the First-Tier Tribunal in 2022, and again at the Upper-Tier Tribunal two years later, and was given a deadline of July 2024 to agree the quantum of the liability it would pay to HMRC.
As confirmed by the administrator’s report, Exchequer Solutions instructed solicitors in February 2024 to issue a letter of claim for professional negligence against the unnamed Professional Advisor in the wake of its defeat at the Upper-Tier Tribunal in January 2024.
Interest has accrued on the amounts that HMRC claims Exchequer Solutions owed, with the document filed by Leonard Curtis with Companies House on 4 September confirming the company would need to raise around £15m to clear its tax liability.
The situation prompted the company to seek advice from Leonard Curtis on what its options were, in terms of continuing to trade in May 2024, and the company was placed into administration two months later.
The document confirmed that Exchequer Solutions had the option of entering into a Time To Pay agreement with HMRC, which would give it a set period of time to repay the tax it owes, but pursuing this course of action was decided against.
“The cash flow forecasts prepared by the company show that it was not anticipated that the company would have sufficient funds in order to make payment of the HMRC liability in respect of the determination, along with current and future sums due to HMRC,” the document stated.
In the midst of its investigation by HMRC, Exchequer Solutions became a member of the Freelance and Contractor Services Association (FCSA) in May 2020, which is an industry body that provides accreditation to umbrella firms that are operating compliantly.
Previously, the FCSA told Computer Weekly – in the wake of the firm’s unsuccessful appeal at the First-Tier Tribunal – that Exchequer Solutions remained a member, because HMRC’s investigation into the company was focused on tax years that pre-dated it securing the industry body’s compliance accreditation.
In a statement to Computer Weekly, FCSA CEO Chris Bryce said the organisation was aware of Exchequer Solutions’ fate, and confirmed the company is no longer a member.
“FCSA does have a liquidity requirement, and also a requirement for new applicants and existing members to disclose any investigations by HMRC,” he said. “Exchequer Solutions complied with both these conditions until their decision to accept the Tax Tribunal’s findings, when their liability crystallised.”
Dave Chaplin, CEO of contracting authority ContractorCalculator, said the case is another reason why the roll-out of statutory regulation for umbrella companies cannot come soon enough.
It’s a topic that’s been discussed and consulted on by the UK government since at least 2017, in the wake of the roll-out of the IR35 public sector reforms, which led to a sizeable uptick in the number of contractors working via umbrella companies.
Tax avoidance fronts
Cross-party MPs have also repeatedly raised concerns about how the unregulated nature of the umbrella company market has paved the way for firms to act as fronts for tax avoidance schemes, and resulted in thousands of contractors facing life-changing tax bills as a result.
“This case further reinforces the pressing need for government regulation of the umbrella sector to ensure that everybody in the supply chain is acting compliantly, [because] self-regulation, on its own, has not worked,” he told Computer Weekly.
“The previous Conservative government made some good progress when it started to examine the sector, and we are still waiting to hear the findings of the most recent consultation. The new Labour government must now complete the process and take decisive action to eliminate non-compliant practice. Surely all the effort put in thus far cannot now be kicked into the long grass?”
Seb Maley, CEO of contractor insurance provider Qdos, shared a similar view with Computer Weekly. “This case is yet another in a long line like it that highlights the importance of the new government delivering on a promise that its predecessors failed to,” he said. “The bigger picture here is that the umbrella industry desperately needs regulating. Billions of pounds flow through it, millions of people work in it and thousands of companies form part of its supply chain.
“Umbrella workers need protecting – to be confident that the umbrella they operate through is tax compliant,” he said. “As do end-clients, which can easily find themselves carrying the can for tax avoidance. And as this case suggests, the exchequer loses out, too.”
Computer Weekly contacted the Department for Business and Trade, which is overseeing efforts to roll out regulation to umbrella companies, to ask for a clarifying statement about how this process is progressing.
“We have set out an ambitious agenda to Make Work Pay and deliver once-in-a-generation upgrades to workers’ rights,” said a spokesperson for the department. “We are committed to tackling non-compliance in umbrella companies and are actively considering what the next steps are.”