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This publication is available at https://www.gov.uk/government/publications/spotlight-24-employment-allowance-avoidance-scheme-contrived-arrangements-caught-by-existing-rules/spotlight-24-employment-allowance-avoidance-scheme-contrived-arrangements-caught-by-existing-rules
The Employment Allowance (EA) entitles employers to save up to £3,000 of employer’s National Insurance contributions (NICs) a year. Since its launch in 2014 over a million employers have benefited.
To ensure 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 EA has recently caught the attention of the media, including BBC’s Today programme and BBC online on 29 May 2015.
Scheme promoters suggested that users of the scheme could save themselves their entire employer NICs bill. The proposition is that a payroll company takes on your company’s staff and sets up underlying companies. Then each underlying company employs small numbers of your staff.
Your company is invoiced for the services that your ex-staff provide, because you no longer employ them. Each underlying company then claims the full EA to wipe out the employer NICs due.
This scheme sounds too good to be true and it is. There is a targeted anti-avoidance rule included within the EA. Therefore, attempted avoidance schemes like this, which seek to use artificial and contrived arrangements to get an unintended advantage, do not work.
The view of HM Revenue and Customs (HMRC) is the scheme simply does not work. HMRC strongly advises anyone who has used such a scheme to withdraw and notify. Scheme users will avoid the costs of litigation and minimise any interest and penalties due on underpaid National Insurance if they do.
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, with possible interest and penalties on the NICs due.
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