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The tax scam that left social workers on the brink of bankruptcy

Posted on 28/07/2016 by


Community Care investigation finds agency practitioners hit by tax bills of up to £45,000 after using company later found to have flouted tax rules

Social workers have been pushed to the brink of bankruptcy and burnout after being caught up in a tax avoidance scheme run by a company they were directed to by their recruitment agents, a Community Care investigation has found.

Practitioners have been hit by tax bills of up to £45,000 each after using Costelloe Business Services (‘Costelloe’), a firm found to have flouted tax rules in the way it set up and ran limited companies for hundreds of agency social workers and more than 200 health professionals.

The HMRC won a court battle against Costelloe in April, with a tribunal ruling the firm illegally avoided paying the correct level of tax and national insurance for practitioners’ companies between 2007 and 2010. The tribunal dismissed an appeal brought by five practitioners, including two social workers, and agreed with HMRC they were liable for a total of £378,000 in unpaid tax between them.

Retrospective tax bills

The HMRC expects to recover up to £9m in total from the Costelloe case. Costelloe ceased trading in 2010 and was dissolved following the tribunal ruling. Social workers have been hit by retrospective tax bills of up to £45,000 each as HMRC transferred tax debts racked up by Costelloe’s operation onto individual limited company directors. The tribunal ruling means the taxman will step up efforts to claw back unpaid taxes from practitioners.

Some social workers facing substantial tax bills have considered declaring bankruptcy or selling their homes, as they struggle to find the funds to pay up. Others have struck deals with HMRC or paid in full, with one social worker, a single parent, maxing out four credit cards to pay out almost £15,000. In a few cases HMRC have dropped payment demands after failing to make assessments in time.

Burnout and health problems

Several social workers say the stress of being pursued for payment by HMRC has taken a toll on their physical and mental health. One believes the pressure contributed to her having a stroke. Another claims the strain was a factor in her burning out and quitting the profession.

Social workers told Community Care they were usually directed to Costelloe by recruitment agencies they had signed up with. Costelloe then set practitioners up as limited companies and advised them to be paid by way of a small salary, expenses and large dividends.

Such arrangements can be legitimate but there are strict rules around how they should operate. Costelloe was found to have breached these and was caught by ‘Managed Service Company’ legislation introduced in 2007. As a result, practitioners’ earnings should have been subject to full PAYE tax charges.

Crucially Costelloe was found to be “involved” – a legal term – in the practitioners’ companies. The firm had influenced the finances of the contractors and the way they paid taxes; and benefited financially from the ongoing work of the social workers, nurses and other practitioners, the ruling found. Costelloe was also found to have falsified documents relating to dividend agreements and earned interest of £126,000 by holding tax deducted from practitioners’ salaries in its own account.

‘Costelloe is not a one off’

Kye Burchmore, director at Assured Tax consulting, and who represented some practitioners involved in their dealings with HMRC, says the case is the tip of the iceberg.

“Costelloe is not a one off. There are many companies that operate in a similar way although they will all say they operate slightly differently or don’t get quite as involved. But in my opinion, it is a slippery slope and while it may be true of some, HMRC are currently targeting others under this legislation and I believe other companies will also fall foul of this law.”

Burchmore says there was a benefit to recruiters in having locums set up as limited companies.

“Agencies would not want individuals on their own PAYE because it costs the agency much more and means they accrue employment rights. If they [social workers] had their own limited company however, these costs and rights would not apply. Many individuals may have then chosen to set up their own company with their accountant etc. Others that did not have an accountant, or the knowledge to set up and run a company, would need help – and be directed to Costelloe.

“This gave the individual the tax benefits of having a limited company without any of the hassle. Most individuals were simply told to go down this route by the agency and took it in good faith that there were no issues. They were not tax experts and would not know anything about this legislation.”

‘I was on the verge of a breakdown’

In a series of interviews with Community Care, social workers caught up in the Costelloe case said consultants at several major players in the health and social care recruitment market had directed them to Costelloe’s services. These include Hays, Sanctuary Personnel, Liquid Personnel, Blue Care and Medical Technical – the latter two companies acquired by HCL during the 2000s.

Laura says she was introduced to Costelloe by a consultant at Blue Care. She ended up plunging herself into debt in order to pay HMRC almost £15,000. She initially argued over the tax bill, sending them payslips from Costelloe with her tax deductions on it, but she says HMRC were “horrendous” to deal with and “didn’t want to listen”.

“By this point I was on the verge of a breakdown because I didn’t have that money. I was a single parent. There was no way I could get that money either. Basically they said to me ‘tough, pay it or go to court, oh and by the way we’re adding interest on it almost by the day’.

“So I ended up paying about £14,500 which I’m still paying off now because I had to max out as many credit cards as I could, literally maxed out every single one, to pay it and get them off my back.

“My world just crumbled. I felt I’d lost everything. I was on the verge of a nervous breakdown. I was on antidepressants. I was on other medications. For me, at one point I was talking about going bankrupt because I thought I was going to lose everything.”

Leaked email

An email passed to Community Care shows a recruitment consultant at Medical Technical urging a nurse to use Costelloe’s services. In the email, sent in September 2008, the consultant tells the nurse he “can’t stress how much better an option” Costelloe is as it will increase the nurse’s take home pay by hundreds of pounds per week.

While saying the nurse is under “no obligation” to sign up to Costelloe, the recruitment consultant goes on to add, “I see no other feasible option for how we pay you than this particular product”.

An ‘industry-wide’ problem at the time

Claire Billiness, managing director for client solutions at HCL Workforce, says the company underwent a “root and branch” review of practices after she, and a new leadership team, were installed in 2011. Since the reforms HCL’s recruitment consultants have only been able to give locums a list of options of third party companies that have been vetted for compliance with HMRC laws and are on HCL’s ‘preferred supplier list’.

Billiness says the company introduced the changes partly in response to concerns over what she claims was an “industry-wide” problem with third-party companies targeting sales executives to encourage them to refer clients.

She says she was not aware of the specific incidents Community Care uncovered at Blue Care and Medical Technical and had no way of verifying them as 90% of staff working at HCL during the period Costelloe was in operation had been “transitioned out of the business”. However, she says the evidence showed HCL’s reforms and move to a preferred supplier list had been “absolutely the right thing to do”.

Billiness says she feels some third party companies were “incredibly opportunist” and recalls walking through her building on one occasion and seeing two people she didn’t know in one of the kitchens with doughnuts.

“I said to the sales execs ‘who are these people’?…They said ‘they’re an umbrella company’. I said ‘why on earth are they buying you doughnuts?’ They said ‘well because they want us to recommend their services to our locums’. Straight away for me it started warning bells…So I immediately banned them from being onsite because I wasn’t comfortable about it.

“This process of targeting sales execs to recommend companies was endemic [across the industry] and in our view completely wrong. For me it was encouraging sales people to abuse their position in an organisation. It’s not their place to be doing this.”

Asked whether the companies would offer consultants incentives to direct clients to them during the period Costelloe was in operation, Billiness says: “I’ve heard of that, where sales guys were targeted. I’m not saying it happened at HCL but it’s one of the reasons I said look tell me about these companies…I don’t know whether that was the case at Blue Care because no one’s going to tell me that. The only evidence I had was doughnuts.”

HCL now works with three umbrella companies which have to meet certain criteria.

“The sales staff can’t refer locums to other organisations and there’s no financial kickback to HCL. We have to ensure that we’re not going to fall foul of any HMRC audit,” Billiness says.

“We’ve worked very, very hard to ensure we are a compliant organisation. The last thing we want to be doing is working with third parties that are non-compliant. It’s about doing the right thing. At the end of the day we’re putting people in jobs that look after vulnerable people whether it’s in the local authority sector or in the NHS sector. And that transcends right across our network of suppliers and we will continue to work with only the best.”

Like Laura, social worker Kathy says she was pushed to brink of bankruptcy by the fallout from the Costelloe case. She received a tax bill for £36,000 and says she was directed to Costelloe by her recruitment agent at Hays.‘I’m not an accountant, I’m a social worker’

“It was my first agency job, I’d never been an agency social worker so I didn’t know that was not how agency social work had to work. And when I spoke to some colleagues they were all doing it because they all worked for Hays and that’s how it was set up. I didn’t challenge it because I’m not an accountant, I’m a bloody social worker.”

When she was hit by the tax demands from HMRC two years ago Kathy sought legal advice. They advised her to consider filing for bankruptcy. She says the pressure from HMRC to pay up was unrelenting and she feared she’d lose her job. Eventually the stress took its toll and Kathy had a stroke.

“I’m a social worker. We’re used to stress. I’m resilient I’m used to dealing with stuff. But when your personal life, your family home and everything you’ve worked and thrived for is threatened then that’s different.

“Now looking back I think ‘you bloody fool’ but when you’re being told to do so by the agency that employs you, and you’ve got an accountant [from Costelloe] ringing you, they’ve got offices and there are other social workers doing it, and no concerns have been raised by anybody, obviously you think it’s fine.”

Child protection social worker Katie has been pursued by HMRC for more than £5,000 in unpaid taxes relating to her Costelloe-related company and was later told to add £2,000 in interest.

She says Hays told her she could either be set up as a PAYE employee or she could “do what most social workers do and go via a limited company”. She claims her recruitment agent then directed her to Costelloe Business Services.

“He gave me a pack for Costelloe and said this is the accountancy firm we recommend. He said if you go through them, you’ll pay them a fee every month and they will work out all of your tax, everything you owe, your take home pay and they’ll put a certain amount aside so you can pay your tax returns when they’re due. And they’ll do it all for you, you pay them a certain amount, and it’s all taken care of.”

‘The letters were threatening. It went on for years’

Katie says the experience of being chased by HMRC for payment has been “terrifying”.

“I know stress. I’m a child protection team manager. I tell you now. You see stress every day, you feel it every day. But the stress from HMRC was a completely different type of stress.

“I felt hounded and harassed constantly. I felt I had no power. The letters were threatening. It went on for years. You’d get another brown envelope and just think ‘Oh God, what now?’ And you’re trying to manage a social work team at the same time, which is completely depleting.”

Katie says she took the agency job in the hope her earnings would help her buy a house and secure her future.

“Instead what happened is, in going into that job, I ended up being trapped in loads of debt and going into work every day in an environment that is ridiculously stressful to pay for a debt that had come out from me going into that job. That really started to twist my head.”

Hays declined to answer a series of questions about these social workers’ experiences or Costelloe Business Services.

Jane, a children’s social worker, was working for Sanctuary Social Care when she says her recruitment consultant directed her to Costelloe Business Services.

She says the consultant told her she’d be paid a higher hourly rate if she went with the limited company option and says he didn’t provide any options aside from Costelloe Business Services.

‘I didn’t find Costelloe – they brought Costelloe to me’

Jane left agency social work to set up as an independent worker a few years later so stopped using the Costelloe arrangement and instead set up her own company with her own accountant.

Then, out of the blue, she was hit by a tax bill for £35,000 from HMRC in relation to her Costelloe company. With the help of her accountant she struck a deal with HMRC for reduced payment, but she remains aggrieved her recruitment consultant directed her to Costelloe.

“I didn’t find Costelloe they brought Costelloe to me. I’d never heard of them. I had no idea what they were.”

Annie was hit by a tax bill from HMRC for more than £2,000 relating to her Costelloe-run limited company. Community Care has seen records of an interview between Annie and two tax inspectors in 2010.

These documents show Annie recalls being told by her recruitment agent she would get an extra £2 per hour if she set up as a limited company. She said her first contact with Costelloe was while working for Sanctuary and also claims she was offered no alternative providers to Costelloe to help her set up as a limited company.

James Rook, Sanctuary’s managing director, told Community Care the evidence of Costelloe’s wrongdoing had “been a shock for everyone” in the recruitment sector.

“The whole recruitment industry has become very wary since it was discovered that Costelloe were not operating in the way they should. We as a business ask for confirmation from every supplier of these services to ensure they are UK-based and working compliantly to HMRC regulations. This is to protect both our practitioners and clients.”

Rook pointed out Sanctuary was a social work recruitment business and not a tax business.

“It is exceptionally sad from the two accounts we have heard of that practitioners have trusted Costelloe to pay their taxes correctly. From what we now understand, they were not, and therefore their directors have a lot to answer for.

“I need to be clear and state that we would very rarely even have a conversation with a practitioner about their own tax affairs. This is because the vast majority of locum practitioners have already set up their means by which to be paid before we work with them.”

‘I did what I thought was right’

Rachel says she was advised to go with Costelloe by her recruitment consultant at Liquid Personnel. She was later hit by a tax bill from HMRC for more than £20,000. She feels cheated by Costelloe’s operation and is angry she was directed to the company.

“I did what I thought was right and paid people [Costelloe] and they haven’t kept their side of the bargain have they? If I bought a white good for example, and it didn’t work, I could take that back. But Costelloe just shut up shop and it’s all our fault? Well no. It’s not acceptable.”

David Hickey, operations director at Liquid Personnel, said “a small number” of social workers with the agency in 2009-10 were paid via Costelloe but “no one” at Liquid “had any knowledge of Costelloe being recommended by any of the staff employed by us”.

He added: “Liquid Personnel conducts rigorous due diligence on payment intermediaries it contracts with not only to minimise our risk but to help contractors as well.

“We have a long history of refusing to contract with intermediaries known to make payments offshore or those who promote tax evasion even if that has meant that the worker has decided to go to another recruitment agency. All our staff receive compulsory training with regular updates on the legal landscape effecting all aspects of recruitment.”

Questions for HMRC

Some social workers Community Care has spoken to describe HMRC as being reasonable and helpful, and say they were able to come to arrangements that mitigated their worries. Some managed to get debts written off – Louisa, who was hit by a tax bill of £45,000, managed to enlist accountants to prove she hadn’t been with Costelloe long enough to owe anything.

But Laura and Katie, along with several others, argue that a heavy-handed, and at times bafflingly inconsistent, approach taken by tax inspectors aggravated their already acutely stressful situations.

Helen, another social worker who had a Costelloe-run company, was grilled by tax inspectors in her home. She said it was “one of the most upsetting things I’ve been through. It made me feel like an absolute criminal”.

For Ginny, a former safeguarding team manager, the pressure contributed to her quitting social work for good.

“I believe the experience ultimately led to me giving up social work. I retired a couple of years ago because I just couldn’t cope. It wasn’t the only thing, it was an accumulation – I had other things going on in my personal life but this just added to it as well. It was just too much and I burnt out.”

Community Care put a series of detailed questions about the Costelloe case to HMRC. The HMRC refused to say how much tax it has so far recovered from Costelloe’s operation, whether it was pursuing action against Costelloe’s directors, or whether it had examined the role of recruitment agencies in directing clients to Costelloe’s services. It also declined to answer questions on tax inspectors’ treatment of individuals or why some social workers managed to strike payment agreements but others were left to pay huge bills.

In a statement, an HMRC spokesman said: “People who used this scheme and who are worried about it should contact us to pay now. We understand that some people will understandably be very worried about the amount of tax they owe as they had been paying very little. HMRC provides help and support to people who genuinely can’t afford their tax bills.”

Source: Community Care