I have been assisting the BBC with their news story, first broadcast this morning on the Today programme, on a new and, in my opinion, extremely abusive tax avoidance scheme.
The scheme abuses the employment allowance introduced in April 2014 that provides small employers with a rebate of £2,000 a year on their employer's national insurance charges. This means that for a company with three employees on the minimum wage most of their employer's national insurance cost in a year is effectively cancelled. The virtue of the scheme can be debated. What is beyond doubt is that it came with many anti-avoidance measures attached. In particular the employment allowance is granted for just one PAYE scheme that a company operates and if a company is part of a group only one company or charity in the group can claim the allowance.
What is also very obvious is that the government did anticipate abuse of these rules. They published extensive guidelines to the new law explaining how multiple claims from linked persons would be identified and stopped. Despite this the evidence the BBC has now supplied to HMRC shows that a large recruitment agency is selling a scheme that creates multiple companies to pay agency workers. Each such company is suggested to be independent of all others used for the same purpose for the benefit of the same ultimate user of the labour of the people being engaged. The result is that it is claimed that each such company, with its own PAYE scheme, can claim the employment allowance for the two or three people it might engage in a year.
The Anderson Group, who are the vendors of this scheme, have appeared to suggest that there may already be thousands of employees being paid through it. It is a claim that may well be true. Over 1,500 companies look likely to have been created over relatively recent months for apparent use in this scheme, all having similar names (they are frequently named identically barring the use of successive numbering) and many share the same registered address in the Midlands. The implication of the data and interview transcripts I have seen is that they share the same back office arrangements.
So, does such an arrangement, if sold by a single vendor to a single end client on behalf of a single scheme creator have any chance of working for the purposes of claiming successive employment allowances? In my opinion, and I know that of HMRC, it does not. That should be obvious. The guidance on employment allowance says that:
Two companies are organisationally interdependent if (in particular) the businesses of the companies have or use common:
ï‚· management
ï‚· employees
ï‚· premises
ï‚· equipment.
If they are organisationally interdependent then a claim for multiple employment allowances should fail. That appears to me to exclude any chance of successful claims being made by the companies in the scheme that the BBC found and of which HMRC now has details.
But this, for me, is not the biggest issue. As I said on the Today programme on Radio 4 this morning:
All I can guess is that they think that if the Revenue come and ask for that Employers National Insurance, what they'll say is: 'Well, there's no money in any of these companies, they're all empty shells, therefore, you can sue us, you can put us in to liquidation, but they'll be nothing for you to have.'' The response to that is that is isn't it time now to consider whether there should be a penalty on the directors of limited companies that are incorporated for the purposes of abusing the tax system.
What purchasers of this scheme are apparently told is that they are guaranteed that there will be no claim against them if the scheme fails. I suspect it is the fact that there will be literally many thousands of companies, few of which will have any significant substance and which look like they will have effectively been used as conduits for the employment of staff with whom they have no substantial relationship, that have been used in this scheme that backs up this guarantee. If the operator of the PAYE scheme is liable for the unpaid national insurance, for which they will not have charged to the clients who make use of the labour they engage, then there is no logical reason to think that these companies will have the funds needed to pay that national insurance if claim is made for it. In that case whether the scheme works or not payment is not likely to be made to HMRC if my fears are correct.
I have long argued that UK companies are being abused for tax purposes. I think that this scheme provides clear evidence of this. The arrangement is wholly dependent upon the ready availability of cheap limited liability companies in the UK, the lightness of regulation that applies to them and the ease with which they can be disposed of when no longer required. Add to this the fact that it is very difficult to make a director of a UK company, or its members liable for its debts.
But if, as I suspect, this scheme shows that systemic use of limited liability is being relied on to make sure that tax is not paid this situation has, as I have also long argued, to change so that where it can be suggested with reasonable probability that limited liability has been used for the purposes of not settling tax liabilities properly due then the liability for that tax should fall on the directors, shareholders and promoters of the scheme in question together with any who might have enjoyed economic benefit as a result of its use (i.e. the end user of the labour in this case), and this liability should be joint and several.
If the government is serious about tackling tax abuse this has to be one its first acts on this issue or this abuse will grow, rapidly. I would urge them to act, quickly.
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Well done, the BBC for uncovering this!
The scheme appears mis-guided from start to finish. Under RTI HMRC would get an early heads-up on this, the costs and admin of setting up hundreds of companies and transferring thousands of employees would be horrendous.
HMRC do, of course, already have powers to pursue directors by issuing a PLN on them under the Social Security Administration Act 1992.
It seems to be that the biggest fruad here is being perpetrated on anyone daft enough to buy into a scheme that just won’t work. Serves them right.
I admit I had forgotten that Act
But it looks like they have lined up hundreds of directors….so someone may have thought about that
I agree with you that this doesn’t seem to work.
I note that s121CSSAA 1992 allows the recovery of unpaid Class 1 NI from the directors of a company, or any other officer, where there is fraud or neglect.
If the Employment Allowance is being deliberately exploited, then this is arguably fraud. If it has not been looked at properly, this is arguably neglect. HMRC only need to be able to argue the case to start each company racking up a pretty significant cost defending itself.
The NI Manual has some good stuff on this (see NIM 12200 for details, if you’re interested in the detail). It predates Employment Allowance, but indicators that s121C should be invoked include situations where the directors are involved with other companies doing the same thing, which would seem to be pretty much bang on the money here.
Thanks
Good point
As incorporation and maintenance of small companies has become cheaper over the last 20 years there have been a variety of different abuses of the corporate tax regime.
Umbrella companies, alphabet shares, ‘goodwill’ on incorporation, dividend waivers, loan account write offs and now employment allowance abuse.
We have two options – to allow accountants to make a living diverting tax and NIC to clients and away from government funds- or to return companies to their original purpose – to provide limited liability to investors where management is separated from ownership. It is lunacy to have a legal framework that encourages everyone from taxi drivers, to plumbers to consultants; to incorporate for tax reasons.
I say this as an accountant. One who deals with genuine medium sized trading businesses and start ups. I am fed up with the audit, consulting and corporate finance advice I provide being devalued and undercut by the sausage factories that provide services of this kind.
I wholeheartedly agree
I agree, Alex.
The simplest solution to what you suggest is to stop taxing companies.
Tax everything at the individual level.
Human beings ultimately bear the economic consequences of taxes paid by companies anyway, so it makes no difference economically – same amount of tax should result. Maybe we would be better able to target the incidence, perhaps.
As long as companies are taxed, these shenanigans will continue. Guaranteed. However there are too many vested interests in favour of the status quo.
Oh please do not be absurd. Those who then make more than their immediate needs can accumulate tax free
Inequality then becomes rampant
Is that what you want?
Suggestions:
1) Tax shareholders (or perhaps just controlling shareholders who can control distribution/retention decisions) of private companies the same as members of LLPs.
2) Tax shareholders of companies where shares are traded only on dividends, and then have a separate regime for CGT on sale.
In any case, elimination of corporate tax avoidance will not be a cost free game regardless of what we come up with. Even if there is more inequality (and I suggest it would be less than you think), there will always be some costs. The question is how much of X you want to trade off in return for Y.
Your main suggestion (the anti-avoidance principle) isn’t cost free.
It gives bureaucrats too much discretion. I know you haven’t worked in the public sector (and seem strangely reluctant to dip your toe in), but trust me, it isn’t something you would want.
Secondly, you’re not even sure it would work. Australia has had something very close to what you propose since the mid-80s. The anecdotal stuff I know from friends who are tax accountants is this: it works against small companies without the resources to fight the ATO.
But at the big end of town, the ATO is too frightened to litigate, so it becomes a horse trade — Vodafone-type situations become commonplace. You’d still have corporate tax avoidance, except it would become unofficially tolerated.
I could throw the question back at you — is that what you want?
I find you very amusing
You are desperate for me to work in public sector procurement as you say I otherwise cannot talk about it but here you are offering comment on areas way beyond your area of claimed professional competence where I do have a lot of experience
One rule fopr you and another for me, eh?
Information on tax is widely available. It is openly discussed. Non-experts can learn a lot from reading and talking to people.
When it comes to how the public sector actually operates, there is nothing much incisive written. People don’t discuss it openly. You simply can’t learn much from reading or simply talking to people.
Different.
If I am wrong (and the tax world is as opaque as the public sector itself) then really, God spare us.
Think that you may be wrong about the public sector, I suggest
Wise people are much more perceptive than you think
Thankfully
Who are these wise people who really get how the public sector works without having worked there? I haven’t met one.
I haven’t seen everything, but have worked as a procurement contractor in about 10 local authorities over the past 12 years. Plus 3 police constabularies, one central government dept (DoH) and 2 universities.
The things I see with my eyes and hear with my ears is quite different to what gets written and discussed in public.
That’s why I think you’d benefit yourself for a stint, assuming you are genuinely interested.
And to compare it with tax knowledge is unhelpful. What percentage of your tax knowledge is in the public domain? I’d say it was very high, given you are not (as far as I can see) an insider.
I have to tell you, your comment simply reads as small minded
Sorry – but it is possible to form an opinion without working somewhere
And on tax – there is a tax profession. Maybe you have not noticed? If so, that’s worrying
Grannie, born 1876, was fond of saying that you could judge someone by the company they kept. She would be astonished now with the modern version of this proverb. In essence it is little different. With all the technical stuff around these days almost any State initiative of any complexity will see the tax evaders and avoiders in full cry and the usual fraudsters. With the rise of game theory into management it is all a great game. But with few winners and a lot of losers, namely the taxpayers. You are right about our antique system of company registration and regulation. It has gone from being an asset to business to being now a serious liability.
Proof again (as if more was needed?) that this country is still the workshop of the world, excelling at engineering – that is ‘financial and tax engineering’.
NI is an unfair tax (& £2k = 13.8% on £14,493 is on low wages anyway),
so NI is more unfair in the first place than this avoidance scheme.
& Umbrella companies do pay normally the Employer’s national insurance in self-employed cases (contractor).
Avoidance is unfair to those who pay in that case. But it is essentially an unfair tax on the poor, it should be reformed as the anti-avoidance measures are strengthened against the unscrupulous agencies.
The employment allowance is only allowed on small companies, that have created job(s) for their employees: this does not apply at all (by definition) to agency workers (weather or not self-employed), so the scheme is outside the law, this may well be called tax evasion/fraud rather than avoidance,
and
(in case the company has been used to evade tax)
“the liability for that tax should fall on the directors, shareholders and promoters of the scheme in question together with any who might have enjoyed economic benefit as a result of its use (i.e. the end user of the labour in this case), and this liability should be joint and several.”
this is just common sense
(as there is tax evasion, this implies that the law is on the side of HMRC on this)
-> HMRC should be in position to expect a judge will indeed rule in their favour on this.
This is just creative accounting childishly & greedily pushing the boundaries on the tax authorities, nothing more, they should just be taught a harsh lesson to be forced to act a fairer & more mature way.
You are wrong on one thing: the EA could apply to one of these companies
As HMRC recently clamped down on the abusive use of travel and subsistence allowances to reduce agency workers’ pay to below LEL so avoiding E/R NICs, it was a complete certainty that someone would try some other means of avoidance.
All PSCs need to register for an employer PAYE scheme and are entitled to claim the EA up to the amount equal to E/R NIC. But HMRC has the power to overlook the existence of a PSC if set up specifically to avoid tax legislation, in this case Agency Legislation. It’s true HMRC would spot the bulk EA claims through RTI, but they would have already spotted the bulk registration of PAYE employer schemes. If that actually happened.
I would bet the scam goes deeper and the employer’s NI was simply withheld on the pretext of being offset against the EA.
I think you are right. and after the penalties debacle, the vendor and client have probably bet that they will get away with it, not because they are right, but because HMRC isn’t well enough resourced to investigate and bring to book.
You seem to be missing the point. There isn’t a comparison with the decision that it isn’t cost-effective to go after a £100 late filing penalty.
Here, it’s not going to be a one-off company. That’s the whole point. If it were a ‘one-off’ stand-alone company it WOULD be entitled to the NIC reduction. Here the scheme as reported would involve a single business trying to get round the rules by pretending it was split into many smaller companies. The savings being put forward are the TOTAL – £300k was mentioned. It would be that amount at stake, not just £2k. HMRC would put resources behind this larger sum – and, going back to why the scheme seems ill-conceived in the first place, what we have is an on-going business risking a run in with HMRC, not a fly-by-night here today gone tomorrow business.
As mentioned by others above, there already seems to be plenty of anti-avoidance NIC legislation about, such that HMRC coud go after the directors. A director of an established business would have to be mad to risk everything by such a convoluted mechanism where he was himself personally liable for the NIC if (as alost certain) the scheme failed.
I suspect that for all the lurid headlines of £20m NIC potentially lost, the reality is that none will be.
Sue
I wish you were right
The directorships are very widely spread
I suspect most will be lost
And 20,000 employees are supposed to be involved so far from one agency alone
If so a loss of £20 million is plausible if HMRC take their usual ‘write it off’ approach to companiss asking to be struck off, as I am sure these will do
For this to work in practice there will have to be a few common directors, or people acting as shadow directors. HMRC will be able to go after those people under s121C quite easily.
That’s quite apart from taking other approaches, such as arguing that the arrangements are a sham and the employments actually remain with the original company.
“…if HMRC take their usual ‘write it off’ approach to companiss asking to be struck off”
I’m not sure where you get this from. HMRC usually look to ensure that tax liabilities are paid off before agreeing to striking-off, in my experience. They can also get companies restored to the register.
And of course they can go after the directors anyway, so striking the company off does no good.
I am very well aware vast amounts are written off – HMRC staff tell me that is the case
As for the shadow director point – I think that a god one
But if thereare also people letting names be used for small sums a few need to be made examples of as well
The answer to all these Tax Avoidance schemes is
1 Make it illegal to create a Tax avoidance Scheme.
2 make it the responsibility of companies to prove their innocence & to pay the legal costs of both sides if found guilty.
Its not big & its not clever.
Its fraud.
The debts can be transferred pretty widely in this case because the arrangement is almost certainly caught by “Chapter 9 ITEPA: Managed Service Companies” and the debt transfer provisions associated with that legislation are very significant.
You clearly have a company in the business of facilitating the supply of services through companies.