Supply teachers paid by offshore firm – taxpayers may foot bill for the lost millions in unpaid employers’ NI contributions

Janet Downs's picture
HMRC is losing millions in unpaid employers’ national insurance (NI) because employees are on the payroll of offshore companies, an investigation by Radio 5 Live has found. The programme revealed how employers, whether recruitment agencies, local authorities or schools, employed supply teachers who were actually paid by an offshore company outsourced to pay supply teachers’ wages. And this company was not paying National Insurance (NI) employers’ contribution.

Tax experts warned that someone had to pay employers’ national insurance – if the offshore company didn’t, then the agency, LA, or school could be pursued. This meant the bill could ultimately be paid by taxpayers.

It was tempting for agencies, LAs or schools to use this method because it reduced costs – the savings of not paying employers’ NI trickled down to the organisation hiring supply teachers. It also seemed to benefit supply teachers because part of the saving went to them. However, if their employer didn’t pay the employers’ NI contribution then supply teachers would find it affected future benefits and pensions, a tax expert warned.

Crawford Temple of the consultancy firm Professional Passport said he had written to Treasury Minister David Gauke in July 2011 to point out the 'potentially embarrassing' issue of public sector agency workers being employed by offshore umbrella companies. He hadn’t received an answer.

The problems are these:

1 HMRC losing millions of pounds of employers’ NI contributions;

2 The possibility of taxpayers having to pay the bill;

3 The pressure on LAs and schools to save money;

4 The competition between agencies to reduce costs;

5 HMRC not enforcing existing rules effectively;

6 The Government failing to tackle the problem.

A tax adviser said public authorities should be careful about how they procure services. Using an offshore company may initially save money but could result in huge bills. What the programme didn’t say was that public authorities could be seen to be complicit in avoiding tax if they failed to ensure that the organisation outsourced to pay wages was paying employers’ NI contributions.

BBC Radio 4’s File on Four has revealed how huge profits could be earned by private companies at the taxpayers’ expense, Channel 4 Dispatches found that one company was profiting from the NHS while offering an inferior service, the National Audit Office (NAO) has warned that public officials who procure services from outsourcing companies need a new set of skills suitable for a commercial environment, the Public Accounts Committee (PAC) has said “due diligence” is missing in the urge to rush through outsourcing contracts and now Radio 5 Live has exposed how HMRC is losing millions from unpaid NI employers’ contributions from an offshore firm outsourced to pay supply teachers.

At the same time the Government makes it known that its preferred method of procurement is through outsourcing. It is failing to confront tax avoidance and cutting HMRC staff who will be needed to implement any measures the Government eventually takes.

And Education Secretary, Michael Gove, attacks the NAO and PAC for being “risk averse”.

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Andy V's picture
Wed, 07/11/2012 - 10:07

This is a classic coalition storm in a tea cup wrapped in smoke and mirrors.

There are many tax advisors who would argue that these companies are not illegal whatsoever and operate within the range of legitimate tax evasion rules.

A far bigger and infinitely more telling question is why hasn't ANY government closed the tax evasion schemes that allow the corporate firms to reduce the tax they pay on their UK generated revenue to truly derisory amounts (e.g. Debenhams, Vodafone, Costa Coffee, Apple, Amazon uk, UK banks). These companies legally avoid paying £billions in tax. The last estimate I saw was £15-20 billion per annum.

Despite this all we've seen is the coalition go after people with undeclared revenue from second homes located in the UK, people paying nannies cash in hand. Now this category rerally is tax avoidance which illegal. The latter example extends to anyone who has paid a trader cash to get a lower price, which I suspect is an awful lot of people.

So let us get this straight: Tax avoid is illegal and Tax evasion in legal.

The ISS and other such umbrella companies (e.g. Key Portfolio) operate within UK tax regulations and as such reduce tax liability by:

a. Registering the employee with HMRC to obtain a legitimate tax number
b. Pay employees legitimate motor mileage allowance and appropriate rates of subsistence allowance, which are then used to offset the gross pay and reduce the taxable amount
c. Pay the tax generated to HMRC and the balance to the employee (i.e. net pay + mileage and subsistence allowances)

If you think of the number of supply teachers nationally, and then try and guess how many do and do not use this method of employment/payment the alleged figure would be rather small.

I'll end with two rhetorical questions: Why did the official tax advisor not acknowledge that if a supply teacher is paid on a daily basis and the offshore company rightly and legally uses a week 1 or month 1 basis then unless there was a medium to long term contract with a school no or very little NIA would be accrued? If any is accrued it is deducted and paid over (e.g. £100-140 per day will not trigger NIA because you are allowed to earn £146 per week before paying NI). The significance of the week/month1 basis is that it is non-accumulative whereas permanent employees (FTE staff) are paid on an accumulative basis.

Why is it that 'we are all in it together' but collectively our MPs are shielding themselves from any form of austerity measures?

* It appears that their considerable range allowable expenses have gone up at least in line with inflation (at RPI even though the unemployed have been moved to a lower rate)
* Parliamentary bars are exempt VAT
* Parliamentary restaurants are subsidised (by the taxpayer)
* MP final salary pensions remain untouched (e.g. an MP serving 2 terms - between 8 to 10 years - who pays the max personal contribution of around 11% will leave with a £22,800 pension for life).

Now that's what I call daylight robbery not companies operating within the law, which is so confoundedly complex and intricate that all too often neither the HMRC nor highly trained and experience tax experts can find their way around them.

Andy V's picture
Wed, 07/11/2012 - 18:38


One could always go the other way too. That is to say, that currently supply teachers are not public sector employees and are not employed by the schools they undertake assignments in rather they are classified as temporary agency workers who undertake work on behalf of their agency who organises their remuneration, which can vary from one school to another. However, if all teaching staff were treated in the same way i.e. supply teachers paid according to their main scale entitlement (including UPS) and received the teachers pension reckonable service for each day they worked - including paying their TPS contribution and receiving the employers contribution - then it might be a level playing field.

Instead we have a parlous situation whereby some agencies refuse to acknowledge the temporary agency worker regulations and many school ignore the guidelines of supply teacher v cover supervisor and qualififed teachers lose out hand over fist. Many schools who require cover supervisors and realise they've got a qualified teacher then expect the colleague to perform as teacher but for less than half the going rate (e.g. £50 - 75 per day).

Reckon that takes the issue to legitinate tax evasion v 21st century Dickensian-style employment practices.

Janet Downs's picture
Thu, 08/11/2012 - 08:20

Andy - you're correct. The programme made it clear that the pressure to cut costs meant that schools and LAs went to agencies that offered the cheapest price. There was also a pressure among agencies to reduce their prices - hence the return of unacceptable employment practices and the kind of exploitation that you describe.

A possible answer would be for LAs to provide properly qualified supply teachers who would be paid the going-rate and have acceptable conditions of service. That's not going to happen, of course. With more schools converting to academies they will be responsible for hiring supply teachers - the desire to do this cheaply coupled with permission to use unqualified staff will see more properly qualified supply teachers being left without work or having to accept low levels of pay.

Ricky-Tarr's picture
Thu, 08/11/2012 - 14:00

I don't raise this critically or pedantically, but just to keep you on the right side of the defamation threshold: I think you've got the evasion/avoidance thing arsy versy. It's evasion that's unlawful.

Andy V's picture
Thu, 08/11/2012 - 16:57

Thank you Ricky. You, as you usually are, right. Apologies to all readers for inadvertantly switching the terms around, other than that the thrust of the comments remain unamended and a fair reflection of the situation.

PS the rumour mill has it that several MPs are paid their main and subsidiary salaries to tax avoidance schemes (e.g. off-shore or PSCs).

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