Growing numbers of people on low and moderate incomes are being misled and even forced into using limited companies in order to obtain work, and risk being caught in anti-tax avoidance legislation, say tax campaigners.1
The Low Incomes Tax Reform Group (LITRG) is calling on HM Revenue and Customs (HMRC) to pursue organisations that wrongfully force people to use personal service companies to obtain work.
LITRG is also calling on the Government to do more to provide information to workers to help them understand whether the conditions agencies and employers are seeking to impose on them are legitimate. In addition, HMRC are being asked to provide a clear, quick and easy reporting route so that individuals have leverage in obtaining proper employment. LITRG is concerned that the workers themselves risk challenge by HMRC if forced to work upon terms that enable the employers to avoid tax – but if they refuse work they could equally be refused benefits by the Department for Work and Pensions (DWP).
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.”
A common scenario involves workers who sign up with an employment agency. They are told their services must be provided through their own limited company or an umbrella company rather than the agency employing them directly and operating PAYE. In most cases the worker has insufficient knowledge to understand the implications and costs of this. Often they believe they are being taken on as an employee of the agency or engager, and only find out that that is not the case when the paperwork comes through and they are asked to sign up to work for a different company, or when they see their first payslip.
One area where problems arise is around employment expenses, where for example, umbrella companies2 deduct a fixed amount from the worker’s gross pay for business travel or subsistence expenses when in many cases no such expense has been incurred. LITRG is aware of many cases where vulnerable taxpayers have been left with a significant tax bill at the end of the year. Meanwhile, the umbrella company has avoided accounting for employer national insurance contributions (NIC) on the correct amount of pay. Indeed, sometimes the company has disappeared, leaving HMRC’s only recourse to pursue the individual taxpayers for the tax and national insurance.
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.”
Notes to editors
LITRG’s concerns are based on evidence of problems the tax charity TaxAid encounters with inappropriately “self-employed” low-income workers, as well as queries directed to the LITRG website. Additionally a BBC 5 Live documentary, on which LITRG’s Technical Director, Robin Williamson, featured, reported on this issue on 21 October, with a further documentary, featuring CIOT Tax Policy Director John Whiting, on 4 November.
An umbrella company is a company that acts as an employer to agency contractors who work under a fixed term contract assignment, usually through a recruitment employment agency.
LITRG’s concerns are set out in the Group’s response to a government consultation on ‘Lifting the Lid on Tax Avoidance Schemes’. The response can be read at: http://tinyurl.com/9sc26z2
The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities. The CIOT’s 16,500 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’.
External Relations Manager
D: +44 (0)20 7340 0569
M: +44 (0)7740 477374
The Chartered Institute of Taxation
Registered charity number 1037771
The Association of Taxation Technicians
Registered charity number 803480
Registered company number 2418331
VAT Registration Number 497 5390 90
Low Incomes Tax Reform Group - an initiative of the Chartered Institute of Taxation
1st Floor, Artillery House, 11-19 Artillery Row, London SW1P 1RTMore Articles by Chartered Institute of Taxation (CIOT) ...