Tax avoidance in the labour supply chain

Many contractors and temporary staff are still getting caught up in contrived arrangements that incorrectly promise they can keep more of their earnings, according to recent warnings from HMRC. Contractors and temporary staff using these arrangements, and employment businesses and agencies further up the labour supply chain, need to be on the alert.

HMRC recently updated its list of named tax avoidance schemes. This follows its warning for agency workers and contractors issued on 25 August, about tax avoidance schemes used by some non-compliant umbrella companies.

What is notable, from both the list of tax avoidance schemes and the HMRC warning, is that the tax avoidance schemes highlighted follow a similar structure. The users (normally contractors or temporary employees) are employed by the umbrella company (the employer) and receive payment from the supplier in two parts:

  • The first part is an amount recorded as salary, purporting to satisfy National Minimum Wage regulations, and which is subject to income tax and Class 1 NIC under PAYE by the employer.
  • The second part is often described and structured as an advance (ie a loan), which is not taxed or subjected to NIC under PAYE by the employer.

Many of these types of arrangements supposedly secure a tax advantage, yet in reality do not secure the promised tax and NIC advantages. This is because the advance, regardless of how it is described, should be taxed and subject to NIC under PAYE by the employer as part of the contractor’s employment income.

PAYE regulations generally place the responsibility for tax and NIC due under PAYE on the employer (ie the umbrella company), but there are circumstances when the tax can be recovered directly from the employee. Unfortunately, this means that the typical users of these schemes – contractors and temporary workers – could face large, unexpected tax bills where the arrangements are successfully challenged by HMRC.

It also demonstrates why employment businesses and agencies higher up the labour supply chain must undertake due diligence and check their labour supply chains. They must understand how the pay of the workers they supply to end users is structured. Those employment businesses and agencies caught up in tax avoidance schemes could find their reputations damaged and, in certain circumstances, could even be held responsible for underpaid tax.

While well-run and compliant umbrella companies play a vital role in the temporary labour market, the perception of umbrella companies is often adversely affected by those that persist in using these types of tax avoidance arrangements. It is therefore positive that HMRC is raising awareness of non-complaint umbrella companies to help protect workers, address tax non-compliance, and level the playing field for compliant umbrella companies. 

If you would like to discuss this issue or are concerned about tax avoidance schemes in your labour supply chain, please contact Lee Knight