An investigation by the Guardian into precarious work in the UK has uncovered the use of an aggressive tax avoidance scheme by recruitment agencies that is depriving taxpayers of hundreds of millions of pounds a year.

According to the investigation, the recruitment agencies have been using contrived financial arrangements to reduce their national insurance bills. Furthermore, they have been exploiting VAT rules that were originally designed to help small businesses. The agencies have been able to generate large sums of money with this scheme.

Video footage from the Guardian shows Patrick Griffin of payroll consultancy, Premier Payco, outlining how workers’ contracts are transferred from a single employment agency into a web of thousands of tiny companies to benefit from an accumulation of small tax breaks, and how overseas directors apparently run each of the companies.

The employment agencies identified by the Guardian as using these schemes supply temporary labour to the private and public sector.

Premier Payco, which claims to have 6,000 workers enrolled on its system, cites recruitment group MTrec as one of its clients. MTrec supplies workers to the NHS and a series of industrial clients.

Griffin said his company has a “QC’s opinion” (legal opinion) stating that their scheme legally helps clients avoid taxes, because it is based on “genuine” commercial relationships between the interacting companies and had not been created specifically to avoid tax.

Fiona Coombe, Director, Legal & Regulatory Research, Staffing Industry Analysts commented:

“Whether such a scheme is lawful or not, the issue is whether this activity is in keeping with the intention behind the rules which permit such tax breaks. It clearly isn’t a scheme designed to assist individual entrepreneurs to start their own businesses. The use of multiple companies to supply workers was targeted by HMRC with the Managed Service Company legislation passed in 2007. If this scheme falls within the terms of that legislation, staffing firms using this sort of arrangement may find themselves liable for unpaid taxes, if these small businesses and their individual directors are unable or fail to pay.”

“For the past 10 years HMRC have had to plug the loopholes exploited by payroll providers to reduce the cost of employing temporary workers and this sort of activity does nothing for the reputation of the industry as a whole.”

HRGO, which is a member of the Recruitment and Employment Confederation, was also named by the Guardian as was Jark, another employment agency, which was understood to be using an employment allowance product supplied by financial services group Contrella.

Staffing Industry Analysts contacted Jark and HRGO for comment but the agencies did not respond before the publishing deadline.

Meanwhile, labour and trade unions have called on the government to take action.

Recently, Prime Minister Theresa May announced that employment law and practices in the UK will be reviewed with Matthew Taylor, a former head of the Labour Policy Unit under Tony Blair, appointed to look at job security, pay and the rights of workers in the UK.

REC Head of Policy Kate Shoesmith commented to Staffing Industry Analysts:

“We have been calling on HMRC to provide clarity about the range of tax schemes out there for some time now. Back in 2013, it was the Recruitment & Employment Confederation (REC) that drew HMRC’s attention to the abuse of travel and subsistence schemes. We used our latest consultation response on IR35 this year as another opportunity to call on HMRC to tackle the misuse of the employment allowance and flat rate VAT by PSCs and ‘mini-umbrellas’ where these occur.  We specifically asked that HMRC put more resource into their advice, communications and enforcement strategies.

“Government should focus on those who are deliberately circumventing the rules. For this to be successful, HMRC needs to be absolutely clear on what is and is not permissible,” Shoesmith said.

“Matthew Taylor’s review needs to consider the broader picture of both employment and tax status and how this affects individuals and business decisions. We have reached out to Mr Taylor as he develops his proposals to offer our insight on how today’s labour market works in practice,” Shoesmith said.

The Freelancer & Contractor Services Association has urged all agencies to seek legal advice before embarking on any unusual arrangement with partners in the supply chain.

FCSA stated that when the employment allowance was introduced, anti-avoidance legislation was also issued aimed at targeting firms that seek to engineer ways to exploit the allowance.

Julia Kermode, chief executive of FCSA said, “Compliancy should be at the heart of all agencies and the partners they work with and I would urge all agencies to practice due diligence at all times and know who they are working with. It is worth noting that HMRC’s firm view is that such schemes are notifiable under the disclosure of tax avoidance schemes (DOTAS) rules and anyone who has not informed HMRC could be liable for a fine of up to £1m.  FCSA is committed to setting standards and stamping out unethical practice and I would advise all supply chain partners to seek independent specialist advice about any arrangements that don’t smell right if you want to avoid getting caught out.”

Kermode also commented on Contrella, which is listed as one of the FCSA’s members and named by the Guardian as offering these schemes.

"Associate members are not tested by FCSA for compliance. Any company that wants to become an associate must agree to adhere to the FCSA Charter and self-certify that their business is run by fit and proper persons. The Charter sets out the minimum standards we expect any operator in the sector to uphold.  We were unaware that Contrella were operating like this, we will be establishing the facts and we are not aware of any other associates operating in this way.  Unlike associate members, FCSA’s accredited members undergo a rigorous annual accreditation process to a published code of conduct, independently assessed by regulated accountants and solicitors.  Our accreditation process is very robust and gives assurance to the supply chain that they are engaging with a company which is proven to operate at the highest standard of compliance.  Accredited Members can easily be identified through their orange FCSA logo, and we encourage all our associate members to consider progressing to full accredited member status," Kermode said.  

Rebecca Long-Bailey MP, Labour’s Shadow Chief Secretary to the Treasury, commented:

‘’This is yet another example of how some unscrupulous employment agencies are exploiting loopholes in the law in their pursuit of profit. “Not only do these kind of tax avoidance schemes place workers employed by agencies involved in an unacceptably precarious position, not knowing what will happen to their jobs should the company be investigated, it denies the Exchequer of significant revenue.”

“Tax avoidance and evasion cost the Exchequer billions of pounds every year, money that could be used to properly finance our public services which are in dire need of investment after six years of Conservative failure. This Government has failed to tackle tax avoidance head on and has slashed HMRC’s ability to do so, as evidenced in PCS’ report released today. Labour will shut down these aggressive schemes through our Tax Transparency and Enforcement Programme to get a fair deal for workers and for the Treasury.’’