A recent update to an international tax convention could make it easier for tax authorities to investigate umbrella firms and contractors who may be avoiding tax, according to the chief executive of an international contractor compliance management advisory firm.

In July, the OECD updated Article 26 of its Model Tax Convention, making it easier and quicker for tax authorities to exchange information across international borders. All OECD countries including the UK have agreed to the update.

Brain Daly, chief executive of international contractor compliance management advisory firm, Crescenzi Consulting, tells Recruiter: “This update lets tax authorities gather information about groups of unnamed taxpayers, leaving the way open to make enquiries without firm evidence about suspected tax avoiders who may bank with the same company. For example, where their income goes into the same umbrella company bank account, or is invested in the same fund.” 

Daly explains that where tax authorities discover discrepancies, such as an unusually large difference between the amount paid to the contractor and the umbrella firm’s invoice to the agency, this is likely to trigger further enquiries into both the umbrella and its workers. “The tax authorities will want to look at it. They may ask to see contracts and start to ask questions,” he says.

Daly says the update may be of particular interest to umbrella companies, who have their corporate seat and their bank account in Luxembourg or in Switzerland. 

And he adds that one effect of the update could be that in the future, newly launched umbrella firms will choose to operate out of the UK rather than Luxembourg or Switzerland. 

However, Shaun Parry, account manager at Contractor Umbrella, tells Recruiter: “Whilst this news can be considered to be of no mean significance within the tax world, it is my opinion that any impact on the umbrella industry will be minimal. 

“Compliance is integral to the success and longevity of any umbrella company and therefore any additional investigative powers granted to any government body should be of no concern.”