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HMRC: If it looks too good to be true it probably is

In the wake of concern that agency staff are inadvertently being drawn into tax avoidance by some umbrella companies, HM Revenue and Customs issued the following warning to social workers

Tax avoidance
'Any scheme which claims to let you keep a very high proportion of your wages is probably a form of tax avoidance' - HMRC

Umbrella companies that promote tax avoidance arrangements often assure agency workers they are compliant with tax rules, claiming they will take care of your tax and National Insurance (NI) on your behalf.

But it is a mistake to rely on this assurance rather than check the details first. HMRC does not want workers to be at risk of falling foul of the rules but individuals are ultimately responsible for their own tax affairs.

Any schemes that claim to allow individuals big tax savings and take home the vast majority of their pay really are too good to be true.

We have published information on GOV.UK so agency workers know what to look out for.

Most employment agencies and umbrella companies operate within the tax rules but you should be wary of companies which promise to let you keep a high proportion of your wages by saving you tax. This type of scheme is not likely to be compliant.

The basic rate of income tax is 20 per cent and National Insurance contributions (NICs) are also due on earnings. Any scheme which claims to let you keep a very high proportion of your wages is probably a form of tax avoidance.

Some of these arrangements, will split your monthly income into two payments. The first, usually the smaller of the two, subject to income tax and NICs deductions. The second, a larger payment that is made in the form of a loan or payment from a third party, and tax and NI isn’t deducted. In reality, the loan is unlikely to ever be repaid, so it’s no different to normal income and is taxable.

This is not right and is clearly an arrangement to avoid paying tax.

You should also be wary of employment agencies or umbrella companies who offer these types of arrangements and claim they are ‘HMRC approved’ or ‘HMRC compliant’.  We do not approve any tax avoidance schemes or arrangements.

The advice is simple – steer clear of these types of arrangements. If you are unsure about what’s being offered by a company you should seek genuine independent advice first, as it may be tax avoidance. If you use one of these tax avoidance schemes, you could end up paying back far more than you attempted to save.

Arrangements that reduce tax where a loan or something else is taken in place of wages are extremely high risk. If something looks too good to be true, then it almost certainly is. 

The loan charge

One of the ways the government is tackling these type of arrangements is with a ‘loan charge’. The loan charge will apply to all outstanding loans in these types of arrangements on 5 April 2019.

Anyone who has received such loans instead of standard income and who does not take action now to either settle their tax affairs with HMRC, or repay their loans, will face this charge. They are likely to pay less by taking action and settling now rather than waiting for the charge to come into effect. Guidance has been published on GOV.UK to help people understand what they need to do.

Let HMRC know

If you want to report a scheme that has been set up to avoid tax then click here.