Newly uncovered tax avoidance scheme costing agencies dear

Investigations by leading accountancy and business advisory firm BDO have revealed a tax avoidance scheme which is resulting in hundreds of huge tax bills landing at the doors of oblivious UK recruitment agencies.

On the face of it

The scheme in question appears to involve a single employer and either a trust or individual located in a tax haven, as well as one or more UK- based companies. It is apparent that employees are remunerated with non-taxable loans offering an effective 1% tax rate, so long as they pay 16% of the earnings to a scheme promoter. Apparently it has been sold to more than 2000 individuals and HMRC are on the trail…

Buried in the chain

Workers involved in this scheme have been recruited to work in multinational companies across the UK, with contracts that travel through a chain of UK recruitment agencies and employment businesses.
Many of the recruitment agencies at the top of the chain have found themselves implicated, even where they had no idea of the scheme’s existence, and had carried out reasonable due diligence.

HMRC recovery action

Where PAYE has been avoided in a supply chain, HMRC can collect that tax from any company in the supply chain, if one or more of the parties is based overseas. This is the legislation being used by HMRC in this case, combined with assessments raised under Regulation 80 of the PAYE rules, to raise huge tax demands.
BDO have been made aware of a number of Regulation 80 assessments issued to UK recruitment agencies over the last few months and conclude that it is part of a far-reaching recovery campaign by HMRC.

Avoid being collateral damage

BDO partner Philip Fisher recommends that recruitment agencies receiving Reg 80 assessments should in the first instance lodge an appeal with HMRC, ask for postponement of all tax demanded and subsequently request a statutory review.
Fisher determines that the key aspect to raise with HMRC is how they have arrived at the figure demanded. He commented, “Although the agency will know what they have paid to the third party supplier for the worker’s time, that agency will have no idea of how much the worker eventually receives, or of the effective tax rates which should be applied to that income”.
Fisher also warned against the danger of double taxation in these cases, as even if the recruitment agency pays up without question, the the individual workers will also be back-taxed on the remunerations they have received.

Moral of the story

As is the case here, innocent recruitment agencies can find themselves at the brunt of HMRC recovery campaigns when a new tax avoidance scheme is uncovered, even if they have carried out due diligence on their suppliers.
Using an FCSA approved supplier mitigates this risk.
Full FCSA Members are independently reviewed against the association’s robust Code of Compliance on an annual basis. The assessors are regulated accountants and lawyers and are proven experts within the field. To ensure total transparency, copies of all documentation and audit findings are sent to HMRC as an integral part of the selection and review process.

Out of more than 250 Umbrella providers in the UK, Liquid Friday is only one of 9 to be awarded full FCSA membership.

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