Many contractors we have spoken to over the years have not realised just how much information HMRC holds that would make it easy for them to identify ‘dodgy’ schemes operating in the market. The issue that comes up again and again is why HMRC is not more proactive in its approach and working to close such schemes down faster. Whilst we too take steps to continuously challenge HMRC, there has been little headway. Despite this, contractors need to be alert to the fact that nowadays it is more about ‘when you get caught’ rather than ‘if you get caught’.
Almost everyone throughout the supply chain is aware that all payments through PAYE are now reported directly to HMRC via Real Time Information [RTI]. This submission is made on or before payment and details all the elements of a contractor’s pay. What many contractors may not know is that HMRC also obtains quarterly reports from recruitment companies on every individual they pay where they themselves are not operating PAYE. These reports, which were introduced in 2014, detail each worker’s name, address and National Insurance Number amongst other things. They also include the total sum of money that has been sent to a contractor’s payment intermediary, or umbrella company, for that period.
So, 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 reference 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.
The shortfall is usually the catalyst for the assessment HMRC will issue for any unpaid taxes.
Once a scheme has been identified by HMRC all those signed up to that scheme will receive a bill.
How to avoid a disguised remuneration scheme
If a contractor is taking home significantly more from one provider than the general returns being offered by the market, it is obvious that you are signed up to a disguised remuneration scheme. Some might opt for such a provider believing there is little chance of being caught but be warned.
In some instances, scheme operators do not provide significantly higher returns and so it may be less obvious to detect what is going on. We would suggest the following simple steps to keep yourself safe.
The first step is to sign up for a Personal Tax Account with HMRC. This is a simple online process: https://www.gov.uk/personal-tax-account.
Once you have your Personal Tax Account you are able to check that the earnings that are reported on your payslip are the same as those reported to HMRC, as the information is regularly updated following RTI submissions.
If you find discrepancies, you must immediately try to understand why.
Next: The information you receive from an umbrella on payments generally falls in to two parts. Some provide this over two pages with others breaking a single page into different sections.
The first part you should check is the section that details the income the umbrella has received from the agency.
This is a critical part as most payment systems use these figures to run the payroll calculations.
The information 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.
This summary should align to the timesheet that has been authorised and you are aware of. So, for example, if you have worked five days and you know the umbrella receives £250 per day as the agreed rate, then the total received should show as £1250.00.
We have seen examples where either the number of days has been reduced or the rate reduced resulting in the total received being a lower-than-expected amount. If this is happening in your case and you are still receiving a higher take home pay, then you will be in a disguised remuneration scheme and will face paying a tax bill in the future.
If this is reported correctly, check any deductions being made as company deductions by the umbrella.
If anything seems strange or too high, have it checked.
If you see a line for a loan, or advance deduction, or some other strange term, alarm bells should start to ring.
If all this appears correct then the total received, less the company deductions, should flow down to be the total gross taxable income on the payslip element of the report.
You will have your own tax and NI deducted, and possibly any pension contributions being made.
This will flow down to show your take home pay that will be paid into your bank account.
If the amount you receive into your bank is different, usually more than shown on the payslip, again alarm bells should ring and it is likely you are signed up to a disguised remuneration scheme.
Whilst it is a legal requirement for you to receive a payslip on or before you are paid and the information that should be shown on the payslip is defined by The Employment Rights Act, we are seeing increasing instances where payslips are not available to employees.
Many workers receive text notifications outlining what they will be paid. These do not replace the requirement for payslips.
Some providers send text notifications and have the payslips available online in their secure portal. If you are unclear how to obtain your payslips, ask the umbrella. If you are told that the text message is your payslip, this is not correct and could be concealing the income being reported. Your Personal Tax Account will highlight any discrepancies.
If the text messages refer to loans, advances or other terms not generally associated with employee payments, and the amount shown on the payslip is different to the amount you receive in your bank, then you may well be in a disguised remuneration scheme.
What to do if you believe you may be in a scheme
In some cases, we may be able to help you understand what could be going on.
You will need to make an initial enquiry through our Report a Concern email providing us with as much background information as possible.
We will then assess this and may ask for further supporting evidence.
Depending on the situation, we may charge for work carried out, but you will always be notified well in advance and have to agree before you incur any costs. In most cases we will be able to assist without charges.
HMRC also provides guidance through its Spotlight documents and you can find the relevant ones in our Hot Topics section.
HMRC also has a current campaign – Tax avoidance don’t get caught. There, you can find out how to report bad practice.
Remember, ignorance is no defence. Disguised remuneration schemes have been well documented and publicised throughout the supply chain and HMRC is likely to use all its powers to penalise those individuals identified who are using these schemes. Once caught, you will end up paying more than if you had paid the correct tax in the first place.
Currently, many of the schemes charge higher fees, on the basis you are still taking home more money. However, when it goes wrong, they keep the money they have made and you end up with a big tax bill.
Our message is clear. If you suspect something is not right: Challenge It - Get Out of It - Report It