Despite repeated warnings many contractors are still falling foul of disguised remuneration schemes and leaving themselves vulnerable to tax avoidance liabilities. One of the most prevalent scams is the Two Payment Trick. Here we offer advice on how to spot this form of non-compliant offering and how to avoid being caught out by it.
What is the Two Payment Trick?
In this form of fraudulent practice a provider will offer the contractor two payments for every pay run. Usually you’ll receive your first payment which will be applied at National Minimum Wage and taxed through PAYE. This might not cause immediate alarm. However, you’ll then be given a second payment which will have no tax applied. This may be given a variety of misleading names, such as an ‘advance’ or a ‘loan’. But they are far from what they pretend to be.
In reality they lure in the unsuspecting, unwary or unscrupulous with the false promise of much higher than expected returns – sometimes over 80% of your total earnings. But they are illegal so don’t be fooled by them.
It’s a question of when, not if, HMRC discovers these anomalies and when it does, it will be you who has to pay back the tax that you should already have paid. HMRC offers clear guidance here and it’s your duty to understand the intricacies of making full and proper payments – so ignorance of the law will not be accepted as an excuse. The inevitable result will see you being required to pay back the money you owe, meaning that, in the end, you receive less money than if you had chosen a compliant provider in the first place.
How will HMRC know?
In 2012 HMRC introduced its Real Time Information (RTI) system and updated its PAYE Regulations to reflect this. Under this new system all information about tax and other deductions is sent to HMRC by the employer when an employee is paid. The system now covers 48 million employees throughout the UK. Further details can be found here.
HMRC also receives quarterly reports from recruitment agencies detailing exactly how much they have sent to umbrella providers for each and every contractor working through them.
The result of the combination of these two processes ensures that HMRC is able to keep a keen eye on exactly where a disguised renumeration scheme could be operating and, once they suspect that untoward practices are taking place, they are able to identify all the contractors using such a scheme.
The Government regularly updates its warnings about non-compliant umbrella companies – a comprehensive guide can be found here, and it has published a list of companies that should be avoided here. The penalties for tax avoidance are severe, including fines and possible imprisonment, and are listed here.
Professional Passport’s Standards
As a strident upholder of the law, and an advocate of the highest levels of professionalism we will never knowingly approve any disguised remuneration scheme. Moreover, we’re firmly committed to ridding the market of them in order to raise standards overall.
It’s thanks to the vigilance of our contractors who provide us with information about the umbrella companies they partner with that we can maintain the highest levels of service and standards across our providers. So if you have been offered an arrangement that you think is suspicious or not what it purports to be we want to hear about it, whether that provider has already been Professional Passport Approved or not.
If you have any concerns please don’t hesitate to get in touch with us by filling in the form on the Report a Concern page of our website. We’re always happy to help and together we’ll improve standards for everyone.