Raising the red flag – is your agency doctoring the Dotas rules?

“Everyone’s moral compass is different, isn’t it?” – Patrick Griffin, Premier Payco.

Tax might be an unwanted outgoing, but the fact remains, it’s a necessary obligation for most companies.

So, when certain businesses (who are as obligated to pay as any other) deliberately employ underhand tactics to avoid paying out, it raises some serious red flags.

Contractors working through Premier Payco, Contrella, or Anderson Group – tune in now.

These temp recruitment agencies, amongst others, have been caught exploiting VAT rules to severely reduce their National Insurance outgoings – and, thereby, costing the taxpayer “hundreds of millions” a year. These VAT rules, which were originally put in place to assist extremely small businesses, have been doctored to allow larger companies – who do not qualify – to gain an unintentional advantage. These schemes must be notified under the disclosure of tax avoidance schemes (Dotas) rules – and any company employing these schemes, who does not notify them under the Dotas rules, could be in line for a hefty £1m fine.

And rightly so. Last year, HMRC warned all organisations using schemes like these to notify them, to “avoid the costs of litigation and minimise any interest and penalties due on underpaid national insurance.” However, despite this advice, it seems that the number of companies employing schemes like these has increased hugely.

The schemes work like this:

• Workers’ contracts are filtered from a single employment agency into a network of many tiny companies, which can each benefit from the tax breaks because of their size
• Each tiny employment business is, in effect, run by an overseas director, who could be based anywhere in the world
• Most worryingly, these schemes are often kept secret from the organisations to whom the employment companies are supplying workers

The general consensus from companies using these schemes is that whilst HMRC might not like what they are doing, there isn’t much they can do – the legality of their practices is dubious, but not in outright defiance of the legislations as they stand.

However, any contractor who is concerned over the practices of the agency they work through – please see the Guardian’s original article on recent HMRC tax avoiders.

Raising the red flag – is your agency doctoring the Dotas rules?