Advanced’ tax avoidance schemes

On 31 August HMRC updated its current list of named tax avoidance schemes. This followed their warning for agency workers and contractors on 25 August about tax avoidance schemes used by some umbrella companies (which are companies that employ temporary workers or contractors, often on behalf of an employment agency).

What is notable from both is that the tax avoidance schemes follow a similar structure. The users (normally contractors or temporary employees) are employed by the supplier (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 is subject to income tax and Class 1 national insurance contributions (NIC) withholding under pay as you earn (PAYE) by the employer.

The second part is often described and structured as an advance (a loan) which is not taxed or subjected to NIC under PAYE by the employer.

Many arrangements such as these, which supposedly have the main benefit of securing a tax advantage, do not secure the tax and NIC advantages promised. This is because the advance, regardless of how it is described, should then be taxed and subject to NIC under PAYE by the employer as part of the contractor’s employment income.

It might be surprising to some, given the adverse publicity similar schemes have received, that contractors and temporary workers still enter these arrangements. Some may sign-up knowing the arrangements do not work, hedging their bets on being employed by an employer who may ultimately be held responsible for the tax and NIC underpaid. Others do so unwittingly, believing the supplier’s contentions that they are tax compliant and merely structuring their income in a way that maximises take home pay.

PAYE regulations generally place the responsibility for tax and NIC due under PAYE on the employer, but there are circumstances when the tax can be recovered directly from the employee. These arrangements could therefore leave users facing large tax bills.

This also demonstrates why employment businesses and agencies higher up the labour supply chain must check their labour supply chains and understand how the pay of the workers they supply to end-users is structured. Those caught up in such arrangements could find their reputations damaged and, in certain circumstances, could be held responsible for the tax underpaid.

These arrangements are clearly on HMRC’s radar as part of their activities to tackle tax avoidance.