Growing worker exploitation and misuse of limited companies
Tax campaigners are warning of the growing trend of the exploitation of workers via the use of limited companies.
More and more people earning low and moderate incomes are being misled and even forced into using limited companies to enable them to obtain work, putting them at risk of anti-tax avoidance legislation.
The Low Incomes Tax Reform Group (LITRG) is now urging HMRC to crack down on organisations that railroad people into personal service companies to obtain work. Their concerns are based on problems encountered by the tax charity TaxAid of inappropriately “self-employed” low income workers together with queries received via LITRG's own website.
LITRG wants the Government to do more in providing information to workers to give them a better understanding of whether the conditions agencies and employers seek to impose on them are legitimate. Without proper guidance, LITRG's concern is that the workers themselves may, on the one hand, fall foul of HMRC if they agree to work under terms that enable employers to avoid tax and NIC but, on the other hand, should they refuse work they could be denied benefits by the Department for Works and Pensions.
LITRG's chairman, Anthony Thomas, explained:
“While it is the inappropriate use of ‘personal service companies’ by highly paid public servants and BBC stars that has made the headlines, for us an even more concerning issue is the increasing use of these kinds of arrangements in relation to many ordinary workers. Many have been told by agencies or employers that they must provide their services through the vehicle of a limited company. These workers are being forced to use limited companies in order to obtain work when they would be better off being employed either by the agency or the client – and indeed probably should be employed.
“Many low and moderately paid workers, including supply teachers, cleaners and construction industry subcontractors, are being inadvertently caught in these arrangements. In most cases the worker does not have a choice not to use such arrangements and, if they refuse, they do not secure work, and may even lose their Jobseeker’s Allowance if they are deemed to have turned down work.”
Common Scenario
Workers who sign up with an employment agency are often told that their services must be provided via their own limited company or an umbrella company rather than them being directly employed by the agency itself. The worker, having insufficient knowledge to understand the implications and costs involved, often believes that they are being directly employed by the agency or the end user. It is not until they are asked to sign the paperwork for a different company or get their first payslip that the reality dawns on them.
Another problem involves phantom travelling and subsistence expenses being deducted from
the worker's gross pay by umbrella companies. Such practices have left vulnerable workers with significant tax bills at the end of the year. The umbrella company, on the other hand, has made a sizeable saving in employers NIC and sometimes the company has disappeared, leaving the poor taxpayer holding the tax and NIC baby.
Anthony Thomas said:
“HMRC must have the capability to go after the organisations that wrongfully force individuals to use personal service companies to obtain work. It is likely that these organisations are also avoiding employment law obligations in addition to NIC. The fact that these schemes continue to proliferate suggests not enough is currently being done, either on the information front or on the compliance side. Just challenging the individuals, who in many cases are victims, will not stop these organisations from flourishing.”
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