HM Revenue and Customs (HMRC) is advising individuals, such as nurses who work through agencies and umbrella companies, to be careful they’re not inadvertently being drawn into tax avoidance.
Those who promote these arrangements often tell people that the schemes operate within the tax rules. They claim they will take care of your tax and National Insurance (NI) on your behalf.
However, it’s a mistake to rely on these claims without checking the details first. You are ultimately responsible for your own tax affairs and we do not want anyone to be at risk of falling foul of the rules.
We have published information to help you understand what to look out for.
Most employment agencies and umbrella companies operate within the tax rules, but you should be wary of companies that promise to let you keep a high proportion of your wages by saving you tax. This type of scheme is not acceptable.
Income tax and National Insurance contributions (NICs) are due on your earnings. Any scheme which claims to let you keep a very high proportion of your wages with little tax and NICs deducted is probably a form of tax avoidance.
Some of these arrangements will split your monthly income into two payments:
- A small payment, is subject to income tax and NIC deductions (the basic rate of tax is 20%);
- A larger payment made in the form of a loan or payment from a third party, from which tax and NICs aren’t deducted.
In reality, the loan is unlikely to ever be repaid, so it is no different to normal income and should be taxed. This is clearly an arrangement to avoid paying tax.
You should also be wary of employment agencies or umbrella companies that offer these types of arrangements and claim these schemes are ‘HMRC approved’ or ‘HMRC compliant’. We never approve any tax avoidance schemes or arrangements.
Our 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.
One way the government is tackling these arrangements is with a ‘loan charge’. The loan charge will apply to all outstanding balances on loans in these types of arrangements on 5 April 2019.
Anyone who has received 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.
If you have been involved in a scheme like this, you are likely to pay less by taking action and settling now rather than waiting for the charge to come into effect. We have published guidance on GOV.UK to help people understand what they need to do.
If you want to report a scheme that has been set up to avoid tax then you can let us know.
Phil Gilbert is disguised remuneration project lead at HM Revenue and Customs