An investigation by the Guardian newspaper has sparked calls by the Labour party and trade unions for the government to take action, after it revealed that a number of temporary recruitment agencies are using an aggressive tax avoidance scheme that is costing the Exchequer “hundreds of millions” of pounds each year.
The scheme apparently stores up tax liabilities in a small shell company in the organisers’ knowledge that the tax debts will never be paid. Should HMRC ever catch up with the company then it will simply fold.
Mini employment companies are created which only employs 2-3 workers, so its PAYE tax and NIC liabilities are relatively small. However, those liabilities can be effectively wiped out by each mini company claiming the Employment Allowance, which is designed to reduce annual employers’ NIC bills by up to £3,000 each year thereby helping small businesses.
The wheeze doesn’t stop there though, as the companies also take advantage of the VAT Flat Rate Scheme which is available to those businesses whose annual turnover does not exceed £150,000. Each company is therefore able to generate a profit by charging 20% VAT on its sales but only paying 12% on its VAT inclusive sales over to HMRC.
Unsophisticated the scheme may be, yet Premier Payco, the scheme provider, claims 6,000 temporary workers are enrolled on it. Whilst being filmed undercover Patrick Griffin, of Premier Payco, explained to the Guardian that workers’ contracts are transferred from the agency into thousands of mini companies for the purposes of taking advantage of tax breaks, and how each of the companies are seemingly run by overseas directors.
Just like many tax avoidance schemes, the Premier Payco version is supported by a QC’s opinion and the company claim it is all above board because it is based on “genuine” commercial relationships between the interacting companies and tax avoidance is a simply a by-product of the arrangements.
When asked if he believed the scheme was ethical, Griffin replied, “All I can do is explain to you what our product does. It’s right for some businesses and it’s wrong for other businesses………All I can do is present to you the case that what we’re doing is effective, it works and it complies with all of the laws as they’re currently written.” A spokesman for Premier Payco reinforced Griffin’s sales pitch by commenting, “We are confident that we operate within all relevant guidance and legislation, and we constantly review the regulatory landscape to ensure our ongoing compliance by reference to a leading counsel, tax advisers and employment specialists.”
There are those within the legal profession however who believe the scheme is doomed to failure as one of its main purposes is to avoid tax. One of those is Jolyon Maugham QC, a tax barrister at Devereux Chambers, who is of the opinion that “this sort of abuse runs into the hundreds of millions if not billions of NIC and prospectively VAT.”
Despite HMRC’s recent strides in clamping down on tax avoidance and in particular a different scheme used widely by the employment agency sector, these type of schemes are proving more popular with agencies that supply temporary labour to well known UK businesses and the public sector. These are agencies such as:
It must be stressed that not all of these agencies are clients of Premier Payco as similar avoidance schemes are offered by Contrella and Anderson Group.
Both HRGO and Jark maintain that they take compliance seriously and sought legal advice before signing up to this type of scheme.
Shadow chief secretary to the Treasury, Rebecca Long-Bailey, condemned these agencies for “exploiting loopholes in the law in their pursuit of profit” and also commented, “not only do these kind of tax avoidance schemes place workers employed by agencies involved in an unacceptably precarious position, not knowing what will happen to their jobs should the company be investigated, the deny the Exchequer significant revenue.”
After this recent expose these schemes may not have much more of a shelf life depending on how quickly HMRC moves to close them down.