Low-income workers are being misled and even forced into using limited companies in order to obtain work, and risk being caught in anti-tax avoidance legislation, a tax group has warned.
The Low Incomes Tax Reform Group (LITRG) has now called on HMRC to pursue organisations that wrongfully force people to use personal service companies to obtain work, warning that increasing numbers of people on low and moderate incomes are being forced to take up work in this way but unknowingly risk being caught on the wrong side of tax laws.
Among the most common cases are those in which workers who sign up with an employment agency are told that their services must be provided through their own limited company or an umbrella company rather than the agency employing them directly and operating PAYE. In most cases the worker has insufficient knowledge to understand the implications and costs of this.
The impression they have is that they are being taken on as an employee of the agency or engager - only to later discover that is not the case when the paperwork comes through and they are asked to sign up to work for a different company, or when they see their first payslip.
The LITRG said that one area where problems arise is around employment expenses, where for example, umbrella companies deduct a fixed amount from the worker's gross pay for business travel or subsistence expenses when in many cases no such expense has been incurred.
LITRG said it is aware of many cases where vulnerable taxpayers have been left with a significant tax bill at the end of the year after the umbrella company has avoided accounting for employer national insurance contributions (NIC) on the correct amount of pay.
In other instances, it said, the company has disappeared, leaving HMRC's only recourse to pursue the individual taxpayers for the tax and NIC.
LITRG's chairman, Anthony Thomas said that while it is the inappropriate use of personal service companies by highly paid public servants and BBC stars that has made the headlines, an even more concerning issue is the increased use of these arrangements in relation to ordinary workers.
'Many have been told by agencies or employers that they must provide their services through the vehicle of a limited company. These workers are being forced to use limited companies in order to obtain work when they would be better off being employed either by the agency or the client - and indeed probably should be employed.
'Many low and moderately paid workers, including supply teachers, cleaners and construction industry subcontractors, are being inadvertently caught in these arrangements. In most cases the worker does not have a choice not to use such arrangements and, if they refuse, they do not secure work, and may even lose their Jobseeker's Allowance if they are deemed to have turned down work,' said Thomas.
The group has called on government to step up efforts to help vulnerable low income workers potentially facing this situation, by providing information to help them understand whether the conditions agencies and employers are seeking to impose on them are legitimate.
HMRC has also been asked to provide a clear, quick and easy reporting route so that individuals have leverage in obtaining proper employment as the group is concerned that the workers themselves risk being challenged by HMRC, if forced to work upon terms that enable the employers to avoid tax. And in addition, vulnerable workers then face refusal of benefits if they additionally refuse the work.
