Over 1.25 million charities and businesses in the UK have benefited from the Employment Allowance, which was introduced to save employers up to £2,000 on their National Insurance Contributions (NIC) each year. However, as of May 2015, there has been an attempt to exploit the benefits of the employment allowance, which has caught the attention of not only the media, but also of HMRC.
What is the Employment Allowance?
The aim of the Employment Allowance is to encourage small businesses to take on new workers by allowing them to claim £2,000 off their annual employers’ National Insurance bill. You can find out more on the Employment Allowance and if you qualify for the scheme, here.
What is an Allowance Avoidance Scheme?
There have been a small number of cases where firms have tried to abuse the employment allowance in order to save further on their national contributions: this is known as an Allowance Avoidance Scheme. Promoters of the Avoidance Scheme allude that companies can potentially save themselves their entire employer NICs bill. The scheme recommends that the organisation will have their payroll company take on their employees and set up several underlying companies, each of which will employ a small number of the organisation’s employees. Each of these smaller companies can then claim the £2,000 allowance, wiping out the employer NICs liability.
HM Revenue & Customs’ Response
HM Revenue & Customs (HMRC) are well aware of the Allowance Avoidance Scheme and have declared that ‘it will not work’. Within the Employment Allowance there is an Anti-Avoidance instruction that targets schemes such as the above. The Disclosure of Tax Avoidance Schemes (DOTAS) is an anti-avoidance policy that notifies HMRC about any tax avoidance schemes, allowing amendments to be made to legislation if needed. All tax avoidance schemes for NICs must be alerted to HMRC under the DOTAS act within five days of the scheme being implemented. HMRC have specified that those who have tried to implement the scheme should opt to withdraw and notify HMRC in order to avoid having to pay excessive penalties and having their company fully investigated. Those who fail to comply with DOTAS could face fines of up to £1million.
If you are aware of any Tax Avoidance schemes, or would like to find out more about DOTAS, click here.