Worker exploitation linked to misuse of limited companies


 Campaigners are warning that ‘ordinary workers’ are increasingly at risk of exploitation around the misuse of limited companies

The Low Incomes Tax Reform Group (LITRG) claim that growing numbers of people on low and moderate incomes are being misled and sometimes forced into using limited companies in order to obtain work, exposing themselves to the risk being caught in anti-tax avoidance legislation. 

LITRG are calling on the government to pursue organisations that wrongfully force people to use personal service companies and do more to provide information to workers to help them understand whether the conditions agencies and employers are seeking to impose on them are legitimate.

Campaigners fear that workers could risk losing benefits if they refuse work, but open to challenge by HMRC if forced to work upon terms that enable their employers to avoid tax.

LITRG’s chairman, Anthony Thomas, explained:

“While it is the inappropriate use of ‘personal service companies’ by highly paid public servants and BBC stars that has made the headlines, for us an even more concerning issue is the increasing use of these kinds of arrangements in relation to many 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 – and indeed probably should be employed.

Many low and moderately paid workers, including supply teachers, cleaners and construction industry subcontractors, 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 if they are deemed to have turned down work.”

A common scenario involves workers who sign up with an employment agency. They are told their services must be provided through their own limited company or an 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 or engager, and only find out that that is not the case 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 vulnerable taxpayers have been left with a significant tax bill at the end of the year. Meanwhile, the umbrella company has avoided accounting for employer national insurance contributions (NIC) 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 national insurance.

Mr Thomas urged HM Revenue & Customs to pursue the organisations that wrongfully forced individuals to use personal service companies.  He added;

“The fact that these schemes continue to proliferate suggests not enough is currently being done, either on the information front or on the compliance side. Just challenging the individuals, who in many cases are victims, will not stop these organisations from flourishing.”


  • Date posted:
    12/11/2012
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