UK to close ‘contrived’ tax scheme exploited by temp agencies
The UK chancellor, Philip Hammond, is to close a tax avoidance scheme used by temp recruitment agencies. The “contrived” scheme, which is estimated to cost taxpayers “hundreds of millions” of pounds each year, creates savings through multiple claims of the employment allowance and via the flat-rate VAT scheme. HMRC is believed to have received 30,000 applications to join the scheme in excess of expectations this year, the majority of which were from “unscrupulous agencies”. The government will now introduce a 16.5% rate for businesses with limited costs, including labour-only businesses, from 1 April 2017.

The chancellor is to close an aggressive tax avoidance scheme that was exposed by a Guardian investigation as depriving the taxpayer of “hundreds of millions” of pounds a year.

The move follows publication of undercover footage last week that revealed how temp recruitment agencies have been ramping up the use of a “contrived” scheme that seeks to make savings through the flat-rate VAT scheme and multiple claims of the employment allowance.

It is understood that HMRC has received an extra 30,000 applications from small businesses to enrol in the flat-rate VAT scheme – above what it expected this year. A Treasury source said the bulk of the unexpected applications had come from “unscrupulous agencies” looking to benefit from the schemes.

Specifically referencing the abuse by employment firms detailed in last week’s investigation, Treasury documents said: “The government will introduce a new 16.5% rate from 1 April 2017 for businesses with limited costs, such as many labour-only businesses. This will help level the playing field, while maintaining the accounting simplification for the small businesses that use the scheme as intended.”

The flat-rate VAT scheme is designed to free very small businesses with revenues of less than £150,000 a year from red tape. It allows those companies to charge VAT at 20%, but pay it back to HMRC at a lower rate – depending on the sector they operate in.

However, the Guardian investigation exposed how, in the employment sector, flat-rate VAT rules were being exploited by artificially dividing large businesses into hundreds of tiny companies.

Jolyon Maugham QC, a tax barrister at Devereux Chambers, said: “The loss to the exchequer of this sort of abuse runs into the hundreds of millions, if not billions.”

In an autumn statement speech that said the government must “constantly be alert to new threats to our tax base,” the chancellor said: “We will shut down inappropriate use of the VAT flat-rate scheme that was put in place to help small businesses.”

The disclosure of the schemes prompted Frank Field, the chairman of the House of Commons work and pensions select committee, to ask HMRC to investigate.

