NI Pyramid Scheme Warning for Contractors

As a contractor, ensuring tax compliance can already be tricky.

The biggest issue for many is in the form of the off-payroll working rules (IR35), which we’ve talked about at length on our blog.

However, there’s a lot more for contractors to be aware of when it comes to tax, and it can be hard to keep on top of everything—particularly when you’re busy servicing your clients. Unfortunately, ignorance is rarely an excuse, and there’s a new potentially fraudulent pyramid scheme that abuses the National Insurance Employment Allowance that you should be aware of.

How does the Employment Allowance pyramid scheme work?

As you might expect from a pyramid scheme, the NI Employment Allowance scheme operates across multiple ‘tiers’ of companies.

Imagine 10 companies at the bottom of the pyramid (tier 1), each of which employs contractors and makes legitimate payments for services rendered—but what’s the trick?

Each business ensures they have Employer’s Class 1 National Insurance liabilities below £100,000, but then informs HMRC that a mistake has been made because they didn’t realise they were entitled to the allowance. This results in HMRC issuing a tax credit of £5,000 for overpayment to each business within tier 1.

Subsequently, one of the tier 1 businesses is purchased by another which sits in tier 2, and importantly this includes the purchase of the £5,000 tax credit. This company then purchases a second tier 1 business, meaning the tier 2 business now has £10k in HMRC credit.

This scheme continues, with businesses in higher tiers purchasing companies from the tiers below them. Ultimately, the team at the top of the pyramid has enough tax credits to pay their PAYE tax bill.

How can contractors avoid getting caught in this pyramid scheme?

It’s not going to be easy for contractors to identify this scheme, and the only potential indicator will be if a business is sold to another during a project. If there are subsequent sales this is a further sign something might be untoward.

At this stage it’s hard to say what the consequences for contractors will be. Although the fraud would be committed based on the employer’s responsibilities, it’s best to avoid working with businesses that would take advantage of these types of schemes. The best way to ensure you’re compliant is to work with experienced and professional accountants who know what to look out for.

Here at Warr & Co we offer a wide range of accountancy services for contractors, including advice on the most suitable structure for your business, bookkeeping support, assistance with VAT and PAYE filing, and HMRC registrations.

To find out more about how we can help, why not book a free contractor accounting consultation today?