Following reports that a recruitment company has been caught out promoting a scheme to abuse the Employer's NICs allowance. HMRC has published a new anti-avoidance Spotlight, "Employment Allowance Avoidance scheme - contrived arrangements caught by existing rules".

Scheme promoters Anderson Group was caugh on tape by the BBC making a pitch to a staff agency that it could save substantial NICs by engaging its workers through hundreds of newly formed small companies. They told prospective scheme users that they could save themselves their entire employer's NICs liability. A payroll company would take over employment of staff; it had already set up hundreds of small companies in order to group together employees and claim the allowance of £2,000 per year for each company. The ex-employer was then invoiced for the services of its staff, avoiding substantial NICs.

Techically this working of the scheme does not work as there are anti-avoidance rules contained in the orginal legislation. In any case, HMRC's view is that this type of scheme is notifiable under the Disclosure of Tax Avoidance Schemes (DOTAS) rules. Anyone who comes within the meaning of a promoter for such a scheme who has failed to notify it under DOTAS could be liable for a fine of up to £1million.

Background

Agency workers are normally subject to PAYE and NICs and if they supply their services via their own limited companies they should, under IR35, account for PAYE and NICs on deemed salary payments.The £2,000 employers' NICs allowance cannot be claimed on deemed payments made under IR35 by personal service companies or managed service companies. There are also specific measures to ensure that it cannot be claimed if avoidance arrangements are in place qualify (see below). Whilst it is generally not worth a one man or two man company fully claiming the allowance if it can remunerate by dividend because the employee has also a NICs deduction. As agency workers are required to be paid under PAYE the attraction for agencies in setting up a scheme where the agency effectively claims the allowance is pretty obvious although not without some administrative burden for the agency.

Under the 2014 Intermediaries legislation (section 44 ITEPA 2003) an agency, or the supplier of workers also has a duty to report to HMRC payments made gross. These rules come also with anti-avoidance provisions.  Although the Employers NICs scheme does not work for agencies, Anderson were presumably hoping that HMRC's systems would not pick up so many companies.

Anti-avoidance measures included in the National Insurance Act 2014, are as follows:

(10) A person cannot qualify for an employment allowance for a tax year if, apart from this subsection, the person would qualify in consequence of avoidance arrangements.

(11) In a case not covered by subsection (10), liabilities to pay secondary Class 1 contributions incurred by a person (“P”) in a tax year are “excluded liabilities” if they are incurred by P, or are incurred by P in that tax year (as opposed to another tax year), in consequence of avoidance arrangements.

(12) In subsections (10) and (11) “avoidance arrangements” means arrangements the main purpose, or one of the main purposes, of which is to secure that a person benefits, or benefits further, from the application of the employment allowance provisions.

(13) In subsection (12) “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).

Links

HMRC Spotlight 24

Employers NICs allowance guide
Including for OMBs workings to optimise salary v dividends

Back to:  Nichola's SME Tax Update 17 June 2015

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