The contractor management sector is facing fresh scrutiny after the BBC exposed a tax avoidance scheme allegedly being promoted by one company.
Radio 4’s Today programme reported this morning that the scheme works by exploiting the government's Employment Allowance.
Introduced last year, the allowance enables companies to claim £2,000 off their annual employers' National Insurance (NI) bill and was designed to encourage small businesses to hire more staff.
However, the company in question allegedly promoted it to recruitment firms as a means of reducing their own NI liability, by placing their contractors and temporary workers into limited companies. Each ‘personal service company’ would then claim the £2,000 allowance.
The BBC estimates that the “scam” could deprive the Treasury of tens of millions of pounds.
Robin Williamson, head of the low income tax reform group at the Chartered Institute of Taxation, labelled the scheme "highly aggressive" and "abusive".
The Freelancer and Contractor Services Association (FCSA), a trade body we co-founded in order to raise standards in our sector, expressed concern over the revelations.
CEO Julia Kermode said: “The FCSA does not condone these tax avoidance schemes, nor does it represent any firm operating them.
“We support the media bringing this to our attention so that we can unite in opposing the scheme, and take steps towards eradicating such practices. The vast majority of employment service provider firms do not operate in this way.”
Our managing director Derek Kelly echoed these sentiments, voicing “outrage” that such schemes are being designed and promoted.
He said: “This is clearly not what the law was designed to be used for. Recruitment agencies should be taking the lead here and shopping promoters to HMRC.
“Promoters of schemes such as this can face fines of up to £1 million. I would urge APSCo, REC and other recruitment industry trade bodies to speak to their members urgently and ensure that promoters are stopped in their tracks.
“The scheme reportedly involves warehouse workers and other individuals in low-skilled roles. This means that while the worker may save on NI contributions in the short term, he or she will undoubtedly be caught by IR35.
“When HMRC catches up with the worker, it will be them and the recruitment agency that will suffer. Meanwhile, the promoters will be driving off into the sunset in their shiny new Bentleys.
“We have seen this kind of thing in the past, with offshore promoters using loan schemes. Several years later, hard-working contractors are still facing significant tax bills.”