Tax simplification can prevent tax avoidance

By Tom Ryan, researcher


Last night the BBC aired a new investigation exposing widespread abuse of the employment allowance by companies using false directors abroad to cheat the system, using a sketchy scheme which could be costing taxpayers hundreds of millions of pounds. 


The recent investigation found that tax breaks given through the employment allowance have been exploited by ‘mini umbrella companies’ (MUCs), which install fake directors overseas to avoid detection by HMRC, thus avoiding paying thousands of pounds in tax. The complicated system of national insurance means that recruitment companies can hire temporary workers through MUCs, which individually qualify for a £4,000 employment allowance, even though they actually carry out work for larger organisations (in this case, such as G4S).


What is the employment allowance?


  • The employment allowance enables eligible employers to reduce their national insurance bill by £4,000 for the year 2021/21. This amount has been smaller in previous years.

  • The self-employed and limited companies where the director is the only employee paid earnings above a certain amount are not eligible.

  • Jesse Norman, the financial secretary to HM Treasury, said in parliament that employment allowance is “not good value for money” - the government opted to reduce the number of employers receiving it starting in April 2020 to save £1 billion.

  • In the year 2019/20, Employment Allowance cost taxpayers £2.2 billion.


Taxpayers will be shocked to see how common and close to home this practice has become. In one instance, the BBC identified an individual who was hired to work at a Covid testing centre through the recruitment firm ‘HR GO’. ‘John’ subsequently started work at a G4S Covid testing site, and knew nothing of this arrangement until he noticed a company name he did not recognise on his payslip. 


It is clear that the government needs to get to grips with this problem urgently.  According to the BBC report, 48,000 MUCs have been made in the past five years, and 500 Filipino directors were put in place last week. HMRC claim that they are resolving the issue, having closed 22,000 such companies and made a number of arrests. However, journalists interviewed by the BBC said that HMRC lost interest in the topic after being approached in 2019, and didn’t want the data they gathered. Due to a 25 per cent rise in the employment allowance in 2020, the amount of taxpayers’ money at stake is growing rapidly. In 2019-20, the amount spent on employment allowance alone was £2.2 billion, or 0.1 per cent of our whole GDP.


With these sums at stake, this type of dodgy tax avoidance should concern us all. Politicians of all stripes promise to deal with it, but seemingly never can. The exploitation of loopholes in the tax system is not a new phenomenon, but there is one solution to this issue that you’re unlikely to hear from many politicians (or the talking heads on the News at 10) - a simplified tax system. Strategically chopping down Britain’s 18,000 page tax code would eliminate opportunities for dodgy directors to avoid paying their way; free HMRC from chasing fake company directors around the world; and give ordinary businesses breathing room to hire more staff. These are the kind of advantages that lower, simpler taxes offer. 


The TaxPayers’ Alliance has long-advocated for the replacement of employer national insurance with a lower flat payroll levy; a change which would plug the gaps exploited by these rogue recruiters on the make. This simple slashing of the tax code would demonstrate that not only do tax cuts generate growth, but they also encourage fair play - a win-win for all taxpayers.

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