A new tax avoidance scheme that disguises remuneration by paying contractors with a combination of a smaller salary and loyalty points has been identified by HMRC. Users and promoters of job board tax avoidance schemes are already being investigated and are being urged to contact HMRC immediately to get their tax affairs in order.
How does a job board tax avoidance scheme work?
Firstly, the contractor will register with an umbrella company and become their employee. They will be paid through two methods:
1) The contractor will be paid less than their total salary from the umbrella company as a method of reducing their tax and National Insurance Contributions (NIC).
2) The rest of the contractor’s salary that has been held back will be paid to a third party job board. The contractor’s skills will be advertised by the job board and they will receive loyalty points. As part of the job board tax avoidance scheme, the loyalty points that the contractor receives can be converted into cash. This cash will be paid to the contractor with no tax or NICs being deducted.
The contractor will be required to pay the third party for posting their services on the job board.
What does HMRC think of the scheme?
HMRC has confirmed in their Spotlight Publication (edition 37) that the scheme “doesn’t work” and they will be “investigating all users”. As an employee of the umbrella company, the contractor’s income is taxable and therefore claiming cash in exchange for loyalty points is taxable income.
In the long run, contractors using job board tax avoidance schemes may well find themselves in a worse financial position than if they used a compliant payroll service from the offset. This is because they will be responsible for paying the tax and NICs that they owe, as well as interest and the promoter’s fees.
HMRC confirm that “employment agencies and businesses who are involved in this scheme may also be liable for failing to deduct the correct amount of tax and NICs.”
What are the consequences of using a job board tax avoidance scheme?
If you have previously, or are currently using or promoting a job board tax avoidance scheme, you will face an official HMRC investigation. The umbrella company involved will also face an inquiry. HMRC has released the General Anti-Abuse Rule (GAAR) guide to help people identify possible tax avoidance schemes and will deliberate whether or not GAAR applies to the specific job board tax avoidance scheme at question. If it does, qualifying transactions will be subject to a “60 percent GAAR penalty”.
As confirmed in the 2017 Budget, 100 percent of the fees owed can be charged as a penalty. HMRC state that this will apply “to anyone who constructs, markets, sells or otherwise enables the use of abusive tax avoidance which is later defeated by HMRC.”
HMRC will not give up their fight against tax avoidance
HMRC is relentlessly tracking down users and promoters of tax avoidance schemes. In a recent blog article, we have discussed the dangers that contractors and recruitment agencies face when using and promoting offshore intermediaries. Not only can you be caught for current activities, HMRC are also retrospectively punishing parties involved in tax avoidance schemes dating back to 1987.
What should recruitment agencies do?
In order to remain compliant with HMRC legislation and avoid potential penalties in the future, recruitment agencies should only refer their candidates to trustworthy contractor accountants and PAYE umbrella payroll companies. Churchill Knight & Associates Ltd is fully compliant with all UK legislation and will provide your consultants and candidates with an industry leading service. If you have any questions about tax avoidance schemes or would like to find out more about the benefits of referring your candidates to us, call 01707 671645 or email agency@churchill-knight.co.uk.
