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Could you be at risk by trading through a limited company?

Wednesday 12 December 2012

Could you be at risk by trading through a limited company?
Growing numbers of workers risk being caught in anti tax avoidance legislation as they are being misled into using limited companies to get work, say tax campaigners.

The Low Incomes Tax Reform Group (LITRG) wants HMRC to pursue organisations that wrongly force people to use personal service companies (PSCs) to get work.

Earlier this year it emerged that the head of the Student Loans Company was paid through his own company and last month the BBC said it paid thousands of presenters through PSCs.

HMRC is consulting on proposals to tighten IR35 compliance by requiring organisations engaging controlling persons through PSCs to deduct income tax and NI from fees paid to their companies.

The LITRG wants the government to do more to provide information to workers as to whether conditions agencies and employers are seeking to impose on them are legitimate. LITRG chairman Anthony Thomas said this is an issue of concern for 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”

“Many low and moderately paid workers 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.”
In one common situation, workers who sign up with an employment agency are told their services must be provided through their own limited or 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.

Often they believe they are being taken on as an employee of the agency and only find out that it’s not true 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.

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 is aware of many cases where taxpayers have been left with a significant tax bill at the end of the year. Meanwhile, the umbrella company has avoided accounting for employer NICs on the correct amount of pay. Indeed, sometimes the company has disappeared, leaving HMRC’s only recourse to pursue the individual taxpayers for the tax and NI.
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