As the NHS is increasingly forced to rely on contract staff from agencies we reveal how they are being preyed on by unscrupulous financial companies in a bid to “pull the wool” over the eyes of the taxman that could also leave many penniless.
New tax rules have left locum nurses and doctors out of pocket, making them an easy target for exploitative ‘Umbrella’ companies, who openly target NHS staff, offering to save them money by paying their wages in supposedly ‘tax-free’ loans.
In reality the loans are never repaid – meaning they should really be subject to tax like any other earnings. And the taxman is onto these tax avoidance schemes – yet when our reporter posed as an NHS nurse there was no mention of the risks involved as companies openly advertising on the internet talked us through how these unscrupulous schemes work.
Tens of thousands of ordinary workers who signed up to these Umbrella schemes are already facing bankruptcy as Her Majesty’s Revenue and Customs (HMRC) issues demands for years’ of unpaid taxes.
Yet one adviser told our reporter, posing as a contract nurse, that the scheme was compliant with tax rules – while brazenly agreeing that it was designed to deceive HMRC.
What he failed to mention is that tax inspectors are onto this, cracking down on these ‘contractor loan schemes’, leaving many people with crippling debts to pay back tax.
We were told that as many as 100,000 freelancers and contract workers are in HMRC’s firing line, many of them hard-working public servants who face selling their homes and giving up their life savings.
But while HMRC pursues loan scheme victims with tax demands for tens and even hundreds of thousands of pounds, the companies profiting out of signing up workers to these schemes are getting away scot free.
The HMRC was unable to name a single scheme operator that has been prosecuted.
This month the Independent Health Professionals Association (IHPA) warned that many doctors and nurses caught up in contractor loan schemes face financial ruin.
Secretary General Dr Iain Campbell told us: “It’s not a question of whether we’ll see bankruptcies, it’s a question of how many.
“Our position is clear: avoid such schemes at all costs. They spell financial ruin further down the line.”
A report in February revealed the depth of the NHS staffing crisis, with one in eleven vacancies unfilled meaning a shortfall of 100,000 key workers.
Meanwhile the Conservative Government has failed to curb the NHS’ reliance on short-term staff.
And if companies such as the ones we spoke to are advising NHS contractors to carry out such schemes for avoiding tax the cost to the public purse will be even greater.
An Open University study in May showed how £1.5bn has been spent on temporary nurses and doctors to plug gaps left by shortages.
Many of these locum staff are sourced through recruitment agencies, but tax regulations mean nurses have been paying double the normal rate of national insurance – their own contribution, plus their employer’s.
And despite a promise from HMRC to toughen its stance on loan scheme operators, the internet is rife with umbrella companies promising ‘take home’ pay of as much as 90% of earnings – meaning just £5,000 is deducted in tax and fees on earnings of £50,000.
Posing as a ‘Band 6’ mental health nurse – who can earn around £30-£40 per hour on temporary contracts – our reporter spoke to one of the many companies advertising openly on Google offering advice on financial matters for healthcare locums.
In a phone call, a ‘business development manager’ from the firm which is based in a tax haven, explained to us ‘enhanced umbrella’ schemes, which aim to deny taxes from the HMRC with a sleight of hand that turns wages into non-repayable ‘loans’.
He offered our reporter a chance to take home 82% of his pay – leaving just 18% to cover broker and umbrella fees, tax and national insurance.
“The way it is works is they split your payments. You submit your timesheet to the agency and the agency sends funds to the umbrella company,” he explained.
“They pay you a salary and it’s kept low – so for you that’s around £14-£15,000 a year, and that’s what your tax and national insurance come off.
“They then pay you the second payment the same day but like an hour later, and that comes over in the form of an employment loan, and legally HMRC can’t apply tax and national insurance to something that’s paid over in that format.
“It’s purely just a way of formatting your payment so it’s more tax efficient. It’s that simple. The umbrella pays tax and national insurance for you so the money that hits your account is yours to spend, all you need to do is fill in your time sheets weekly.”
Our reporter asked if interest is payable on the ‘loans’, or whether the loaned money ever needs to be repaid.
The answer was: “No, there’s no interest, and you’ll see in the application and facility agreement there’s no repayment terms, but it has to look commercial because if it doesn’t and someone was to ever question it then they’d be like ‘that’s taxable income.’
“It’s just a way of making it look like it’s in that method so you don’t get tax and national insurance on that second payment.
“The facility agreement is a lot of wording, but it’s just in there to keep it compliant, just in case anyone was to ever look at it. If HMRC was ever to ask you how you were being paid, it’s just a supporting document.”
We then asked if the arrangement was designed to pull the wool over the eyes of the HMRC.
The answer was: “Yes, it’s just a clever way of formatting the payment for you so you don’t get tax and national insurance on that secondary payment.”
We also spoke to an umbrella company offering a loan-based ‘enhanced’ scheme who told us we would be expected to lie to our employment agency if we joined.
They explained how their service meant we would pay just £80 tax and national insurance on weekly earnings of £1000 – while they trousered £170 in fees.
Their ‘relationship manager’ said: “You’ll only pay tax on minimum wage with this product – that’s £350 of your £1000, which works out at about £80 in tax and National Insurance.
“Your fees will be about £170. I’ve got a client who pays us £500 a week in fees, which sounds a lot but his take home is so good he’s will to pay that.
“If you start referring people to us, as your relationship manager I would look to drop that fee to say thank you for getting us more clients.
“If you are going to come on board on that product, the loan agreement and contract of employment does state that it’s not to be discussed with any third party.
“So should anyone ask how you’re paid, you’re on a full PAYE product. We like to keep it between ourselves and our clients.
“If the agency ask how you’re being paid you say ‘they’ve offered me a full PAYE product and they’re paying all my taxes for me, they deal with it, they’re my employer,’ and we go from, there.”
We asked if the ‘loans’ paid under their enhanced model ever need to be repaid.
The answer was: “No not at all, that is just an agreement there to protect yourself and us should you have an enquiry from HMRC. I guarantee we won’t be coming knocking for that money. Absolutely not.”
Tax expert Graham Webber is negotiating with HMRC on behalf of 2,000 contractors who have been hit with tax demands, many of them IT specialists who have been paid through loan schemes for nearly 20 years.
He estimates 100,000 ordinary workers are in HMRC’s firing line and reckons 40% of his clients – which include public sector employees such as social workers – face bankruptcy.
Said Graham, of London-based WTT Consulting: “We expect to see HMRC’s actions leading to insolvency, bankruptcy, loss of family homes, breakdown of relationships and physical and mental illness.
“Many who thought they were going to enjoy a comfortable retirement will now be forced to continue working or claim benefits.
“If you are offered something which sounds too good to be true, it probably is.”
An HMRC source said that scheme operators are often acting within the law.
The source said: “Telling someone to do something stupid and financially risky is not necessarily illegal.”
But a spokesman for HMRC said anyone using contractor loan schemes was “highly likely” to be involved in a tax avoidance arrangement.
He explained: “Tax avoidance is bending the rules of the tax system to gain an advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage.
“It involves operating within the letter – but not the spirit – of the law.
“If you’re using one of these schemes and being paid this way, you’re highly likely to be avoiding tax. You could end up paying additional taxes, penalties and interest. HMRC strongly advises you to withdraw from the scheme and settle your tax affairs.”
We put our article to the firm advising on umbrella schemes and a spokesperson said: “We are a marketing company which handles enquiries for a number of Umbrella firms and businesses which have a variety of client needs.
“Our advisors recommend suitable companies for individuals and all such companies fully comply with all aspects of current legislation and all operate in accordance with relevant financial rules and regulations.
“The HMRC schemes you refer to are historic, anything which a Business Development Manager would have spoken about is completely different and fully compliant with current legislation.
“We do not provide Umbrella services or tax avoidance advice, we simply process lead enquiries for clients.”
The other company we spoke to offering enhance umbrella schemes when fronted insisted: “We follow regulations, we’re compliant with HMRC and what we’re doing is completely legal. If you’re not comfortable being on that product, you don’t have to be.”
By Robin Eveleigh and Ben Gelblum