November 4, 2012 6:41 pm

Revenue moves on offshore payroll tax abuse

Revenue & Customs is “actively pursuing” a growing number of investigations against offshore payroll companies, amid concern that up to £40m a year of employers’ national insurance contributions may be lost to avoidance.

A BBC investigation on Sunday said thousands of UK supply teachers were employed by ISS, a Channel Islands-based company, which did not have to pay employers’ national insurance contributions because it was based offshore. The BBC did not suggest that ISS was breaking the law and there is no evidence that ISS is one of the companies being investigated by the Revenue. ISS said it was “meticulous in complying with HMRC codes on taxes and expenses”. It told the BBC that HMRC had no grounds to challenge its employees or business partners.

The issue of avoidance will be raised by MPs when senior Revenue officials appear before the Public Accounts Committee on Monday. Margaret Hodge, who chairs the committee said: “These are allegations I will want to look at. There is growing concern that companies are not paying their fair share of taxes.”

Richard Murphy, director of Tax Research UK, told the BBC the growth of “umbrella” companies was “the next big UK tax scandal”. At least 150,000 workers are estimated to use such companies, which are set up to pay the salaries and expenses of temporary workers, particularly in engineering, IT and construction.

Recruitment agencies sometimes insist workers use the schemes because there is no requirement to deduct the worker’s income tax and NICs, or to pay employer’s NICs on the worker’s fee – as this is the responsibility of the umbrella company – which may suppress the rates charged to end clients.

HMRC said it was unable to comment on individual cases or employment schemes, but added about umbrella companies: “These kinds of arrangements are not compliant with tax and national insurance legislation and the end client or the employment businesses may be liable for any underpaid tax and national insurance.”

“Employers have a legal responsibility to operate PAYE and should be questioning very closely anyone offering quick-fix tax and national insurance arrangements.

“We are actively pursuing a growing number of investigations against these types of arrangements and have already successfully pursued a number of companies for tax, national insurance and interest where they were not playing by the rules.”

Professional Passport, a consultancy that advises contractors and the recruitment industry on tax issues, said a lack of enforcement has encouraged the growth of offshore “umbrella” companies. Crawford Temple, managing director, estimated that HMRC lost £30m-£40m a year from offshore payroll abuses. He said Professional Passport had communicated its concerns to HMRC.

HMRC has faced problems accessing information on offshore umbrella schemes. It recently proposed tougher disclosure requirements, saying that, in one example, it had been unable to compel an offshore umbrella company to tell its workers that they were required to notify HMRC they were using a tax avoidance scheme.

In 2008, it also raised concerns about difficulties in recovering underpaid tax and national insurance contributions from umbrella companies, which had few assets and could wind up and move their workers to a new company.

HMRC said that when employers contracted with recruitment agencies, they paid a fee that included enough for the temporary worker to pay his or her national insurance contributions and a sum to enable the employer to pay its share of the national insurance. But offshore umbrella companies might pocket the money or share it with the recruitment firms that had contracted with it.

In August, HMRC issued a warning that it would challenge new tax avoidance schemes that seek to avoid income tax and national insurance contributions (NICs), which were being advertised to contractors, highly paid employees and those using recruitment agencies. It said: “Current legislation ensures that rewards and recognition from working for UK-based businesses are charged appropriately to UK Income Tax and NICs.”

In recent years, it has tightened up the law on “disguised remuneration” and other schemes designed to avoid tax on employment income, including clawing back £100m retrospectively from users of an Isle of Man scheme. In 2008, it promised to step up its enforcement action against umbrella schemes that dodge tax and national insurance by claiming excessive travel expenses.

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