Employment Allowance avoidance scheme - contrived arrangements caught by existing rules

08 June 2015

An attempted avoidance scheme designed to exploit the Employment Allowance recently caught the attention of the media and HMRC has made clear that such arrangements do not work and are caught by existing rules.

HMRC publish details of tax avoidance schemes currently in the ‘spotlight ‘which they believe are being widely offered to help those using them to avoid paying tax.

HMRC has published the following guidance:

Spotlight 24: Employment Allowance avoidance scheme - contrived arrangements caught by existing rules

The Employment Allowance entitles employers to save up to £2,000 of employer’s National Insurance contributions (NICs), and since its launch in 2014 over a million employers have benefited. To ensure that the benefit of the allowance was felt where it was most needed, anti-avoidance arrangements were included in the allowance from launch. An attempted avoidance scheme designed to exploit the Employment Allowance has recently caught the attention of the media, including BBC’s Today programme and BBC online on 29 May 2015.

HM Revenue and Customs (HMRC) view is that this scheme simply does not work. HMRC strongly advises anyone who has used such a scheme to withdraw. By withdrawing and notifying HMRC, people will avoid the costs of investigation and litigation and minimise interest on underpaid National Insurance and any penalties that might be applicable. HMRC is investigating cases where people have used this scheme and will challenge every case it sees. HMRC recommends that employers considering the use of such a scheme should think again. Users will find themselves out of pocket from the promoter’s fees, and possible interest and penalties on the NICs liability.

Scheme promoters suggest that users of the scheme can save themselves their entire employer NICs bill. The proposition is that a payroll company takes on your staff and sets up underlying companies, each of which employs small numbers of your staff. You are invoiced for the services your ex staff provide - as you no longer employ them. Each company claims the full Employment Allowance to wipe out the employer NICs liability.

This scheme sounds too good to be true and it is. There is a targeted anti-avoidance rule in the Employment Allowance, so attempted avoidance schemes like this, which seek to use artificial and contrived arrangements to get an unintended advantage, do not work.

HMRC’s firm view is that such schemes are 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 not notified it under the DOTAS rules could be liable for a fine of up to £1 million. The definition of ‘promoter’ under the DOTAS rules goes beyond those who devise the scheme itself.

It includes people who:

• make a firm approach to another person with a view to making a scheme available for implementation by that person or others
• make a scheme available for implementation by others
• organise or manage the implementation of a scheme.