Childcare tax breaks revealed as deliberate loophole created by ex-big four accountant

It has transpired that the Government’s new scheme for childcare has been devised by none other than Richard Murphy, the ex-KPMG nanny tax avoidance expert who has single-handedly deprived the UK of several billions of pounds of tax according to my calculations on the tax gap using my expectation methodology.

He has come up with a means of providing state help equivalent to £1,200 per child to parents everywhere. It appears this £1,200 will not go on childcare, but to him personally to run a personal service company for a nanny (or ‘independent childcare operative’ as they prefer to be called).

I have had extracts of a memo passed to me, thought to have originated from Murphy himself and that was sent to directly to George Osborne.

Dear George,

I have come up with a method of providing affordable childcare without it costing the state much.  This should allow you to borrow more money to spend frivolously elsewhere.

So how does it work? First you have to set up a company. As you will have to use an accountant to work this scheme, you may as well buy the company from your firm of accountants. This and all accountancy fees should cost no more than about £1,200 a year. Your nanny has to own this company and be a director, but one of the parent employers should be company secretary.hey can then take responsibility for the administration. (You have to be realistic here: your nanny may not be too keen on this part of the job.)

Once the company is set up, it bills the parents for the nanny’s services. The amount billed should be just enough to cover all its costs.  State on the invoice that fees are not refundable. It is critical that paperwork such as invoices is done. If it is not, this scheme could be challenged as a sham, which it is not when done properly.

Your nanny’s salary will now comprise two parts – salary and a dividend, both paid by the company. The salary should be just enough to make sure your nanny has an NI credit. The remainder can be paid as a dividend.

A dividend has a 10 per cent tax credit attached to it and a basic-rate taxpayer (which the nanny will be) pays no additional tax on receipt of a dividend.  The nanny pays no tax at all on it.

Now the company has three costs: the profits to pay the dividends, the salary and the cost of running it.

You will need some help with this. Bills have to be raised, dividends have to be paid and recorded properly, and the company will have to prepare and file accounts. So you should consult an accountant. But the scheme is legal and cost-effective at a time when there will be a clampdown on ‘cash in hand’ nannies. It has to be worth considering.

Murphy, as ever, has rehashed a piece of work he has done elsewhere and pretends this is an independent source agreeing with his conclusions. Rather sloppily, he makes the error of using a source that clearly names him as the author further on in the memo:

Here’s a link to an article in The Observer which shows how this scheme is completely legal and is approved by HMRC. The TUC, PCS and ARC have also endorsed this plan.

So he has now persuaded the Government to adopt his ridiculous childcare strategies. This is a dark day for democracy.

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