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Contractors: How to avoid disguised remuneration schemes

We mentioned in our previous blog that we were seeing an increase in reports of unscrupulous providers falsely claiming they hold one of our accreditations. Since the introduction of IR35 in the private sector, more and more providers operating disguised remuneration schemes are going to extreme lengths to convince both recruiters and contractors that they’re compliant.


In this post, we turn our attention to contractors and highlight the key things they need to look out for to avoid finding themselves in a disguised remuneration scheme.


What you need to know

All umbrella companies should apply the same tax and employment law rules (although their margins may differ), and therefore what you’re offered should broadly be the same from one umbrella company to the next.


Avoid any umbrella that’s offering a take-home pay higher than you expect, is more than likely operating a disguised remuneration scheme. While it might be tempting to get money in your pocket, it’s crucial to remember that HMRC has all of the information they need to identify a ‘have i got a good idea for you dodgy’ scheme, and it’s you they’ll come after to recoup any lost taxes and National Insurance Contributions (NICs).


Why it’s not worth the risk

All payments through PAYE are now reported directly to HMRC via Real Time Information (RTI). These submissions are made on or before payment and detail all elements of a contractor’s pay. Additionally, HMRC obtains quarterly reports from recruitment companies on every individual they pay if the recruitment company is not operating PAYE. As well as including each worker’s name, address and National Insurance number, the reports include the total sum of money that’s been sent to a contractor’s payment intermediary, or umbrella company, for that period.


It means that when HMRC becomes aware of any provider operating disguised remuneration, they can see from the RTI returns every worker that has been engaged by that company and cross-references their National Insurance number to the Intermediary Reports. This simple check shows the total amounts that have been sent on a contractor’s behalf and compares this to the amount on the RTI report. Once HMRC has identified a scheme, all those signed up to it will receive a bill.


In short, it’s a case of when you’ll get caught, rather than if.


Avoiding a disguised remuneration scheme

Avoiding umbrella companies promising higher returns is straightforward. However, in some instances, scheme operators don’t provide these higher returns, so it can be more difficult to identify when something dodgy is going on. To ensure you keep safe, we suggest the following steps:


1. Sign up for a Personal Tax Account with HMRC

Setting up your account is easy. Once you have it, you can check whether the earnings on your payslip are the same as those being reported to HMRC. If you find discrepancies, you must immediately get to the bottom of it.


2. Always make sure you receive a payslip

Whilst it is a legal requirement for you to receive a payslip on or before you’re paid, and The Employment Rights Act defines the information shown on the payslip, we’re seeing increasing instances where they’re not available to employees.


While many workers receive text notifications outlining what they’ll be paid, they don’t replace the requirement for payslips. Some providers have payslips available online in a secure portal, so make sure you know how to access these. If an umbrella tells you that the text message is your payslip, they could be concealing the income being reported. Check your Personal Tax account for discrepancies.


3. Check your payslip

The first part you need to look at is the section detailing the income the umbrella has received from the agency. It will typically show the number of units you have worked, either hours or days, depending on your rate, the rate paid for each of these units, and the total received. We’ve seen examples where either the number of days or the rate has been reduced, resulting in the total received being a lower-than-expected amount. If this is happening and you’re still receiving a higher take-home pay, you will be in a disguised remuneration scheme and face paying a tax bill in the future.


If there’s a line on your payslip for a loan, advance deduction, or some other strange term, alarm bells should start to ring. Also, if the amount you receive into your bank is different, usually more than shown on the payslip, you’re likely to be signed up to a disguised remuneration scheme.


What to do if you believe you may be in a scheme

If you spot a problem, you must flag it as quickly as possible to avoid any personal financial risk. There are two main ways to report a non-compliant umbrella company - through Professional Passport or directly to HMRC. If you act fast, HMRC may offer you assistance to resolve it. However, if you ignore it and your umbrella company is found to be avoiding tax, HMRC will come after you for any unpaid liabilities.


Always work with an accredited provider

Professional Passport's standards on compliance are widely recognised as the highest in the sector. Going further than just compliance to legislation, we ensure consistent application of industry best practice as well as complete transparency in the dealings with the supply chain.


You can view all of our Approved Providers here. Our list is kept up to date, and we have complete control of it, meaning no company can add themselves. If a provider claims to have a Professional Passport accreditation but doesn’t appear on this list, stay away and report them to us immediately so that we can take the appropriate action.


Your never alone with Professional Passport

If you’re a company looking for support with your contractors, complete the quick form on our contact page for a member of our team to get in touch and discuss our accreditations and membership with you.


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