Individuals who are returning to the National Health Service (NHS) to help to respond to the outbreak of COVID-19 have been targeted by immoral promoters of tax avoidance schemes. HMRC is advising affected individuals to be wary of signing up to these schemes.

The schemes on offer all have common features, but they may be described in different ways. One consistent element will be that the scheme attempts to disguise the true level of earnings, which should be subject to Income Tax and National Insurance (NI) contributions.

The scheme will usually use an umbrella company, and the wages offered will consist of two separate payments:

  • A first payment declared as earnings which is processed through the umbrella company payroll, ordinarily in line with National Living Wage (NLW) / National Minimum Wage (NMW) levels. This could also be a flat rate payment, for example, £100 a week
  • A second payment, which the umbrella company states is not taxable. This could be described as a loan, annuity, shares, a capital advance involving mutual, joint or co-ownership, or a payment derived from a revolving line of credit facility, or some other non-taxable form

Some of the companies may provide ambiguous explanations as to how the schemes work, so the advice is to be alert to any companies that claim to use personal allowances more effectively, resulting in take home figures of anything between 80% and 85% of gross pay.

The payslips provided by the umbrella company may also look incorrect and might detail the first payment only and/or inaccurate deductions from pay.

When individuals are asked to sign documents other than their contract of employment, they should consider this very carefully and should question any requests to sign separate agreements to receive loans, advances, shares, annuities or anything else not relevant to their work. This could result in tax avoidance, and individuals could owe tax and interest, as well as having to pay the relevant fees to the umbrella company.

If individuals believe that they are being offered this type of scheme, they should:

  • Calculate the amount of tax they would ordinarily have to pay on their income, utilising HMRC’s online tax calculator, to determine what their net take home pay should be after tax and NI deductions
  • Request a breakdown of the deductions being made from the person offering the scheme, and check the amounts being charged, what the fees relate to and whether tax and NI deductions have been made
  • Compare the two sets of figures to check whether the scheme on offer is legitimate and compliant

HMRC regularly publishes warnings relating to similar schemes, and previous Spotlights provide further details. Edition 53 gives further detail on how these schemes claim to work, and edition 45 outlines what to look out for in umbrella companies offering schemes that are tax avoidance.  There is alsofurther guidance on tax avoidance schemes aimed at contractors and agency workers.

HMRC are urging any individuals who are already using a scheme of this nature, to leave as early as possible and to settle their tax affairs. They should also contact HMRC immediately.