A quick look at disguised remuneration

We recently wrote an article about the Labour Market Intermediaries report by the LITRG. The report includes some essential information on disguised remuneration, and we wanted to focus an article on this topic for the benefit of our readers. Keep reading to find out more about disguised remuneration and the associated risks of using a non-compliant umbrella company.

What is disguised remuneration?

Disguised remuneration schemes are unethical arrangements where contractors are paid in unusual ways to avoid tax and National Insurance (NI) Contributions. A recent example has involved disguised remuneration schemes paying their clients with loans to avoid tax and NI implications.

HMRC is well aware of such schemes, and in a recent report called ‘Use of marketed tax avoidance schemes in the UK’, they confirm they’re well aware of 20 to 30 promoters of these schemes. So, what is a “promotor”? Promoters “are those who design or market” disguised remunerations schemes.

The report by the LITRG found that some promoters were going as far as to set up umbrella companies themselves so that they could then operate disguised remuneration schemes. It’s worth noting that compliant umbrella companies will never offer tax avoidance schemes or unusual ways to boost your take-home pay retention.

The HMRC report also concluded that 2,000 employers were involved with tax avoidance schemes between 2018 and 2019, and 99% of these were disguised remuneration schemes.

Loan schemes

As we mentioned earlier, loan schemes (or loan arrangements) are a widespread type of disguised remuneration scheme. These schemes involve paying workers with a loan which they’re not required to pay back. By doing this, tax and NI is avoided. Not only is the worker able to retain more of their money (upwards of 90% in some cases), the loan scheme provider can earn considerably more than a compliant umbrella. After all, if the work has used the scheme deliberately to avoid tax, will they care that the loan scheme is profiting too – if they have had their tax and NI contributions slashed?

Why do temporary workers use disguised remuneration schemes?

There are plenty of reasons temporary workers use disguised remuneration schemes (and in particular loan schemes) to process their payroll. Here are the most common:

  • They want to pay less tax and NI, and don’t care about the consequences.
  • They did not understand what they were getting involved with and thought they had found a legitimate way to boost their take-home pay retention.
  • They were told the scheme was perfectly compliant by a business in their supply chain (for example, an inaccurate and misleading referral from a third party).
  • They were told they needed to use the disguised remuneration scheme if they wanted the job (another example of an inaccurate and unethical referral from a third party).

Contractors, freelancers and agency workers should always have control over the way they’re paid and should never feel pushed down a route they’re uncomfortable with. While 99% of organisations in the supply chain (agencies, clients, payroll providers, umbrella companies, etc.) are compliant, there are a few who will try and trick you into paying less tax. We urge you to never engage with a tax avoidance scheme, carry out your due diligence, and choose from providers that have obtained a well-respected accreditation, such as FCSA membership.

The Loan Charge (2019)

The Loan Charge is retrospective legislation that can land users of disguised remuneration schemes in serious trouble – even if they haven’t avoided tax for many years. Due to the significant impact the Loan Charge was having on thousands of workers (many avoided tax accidentally), HMRC changed the legislation. Now, only loan arrangements used after December 2010 will be considered as part of this legislation.

Thousands of contractors and freelancers have been faced with tax bills that have changed their lives. As HMRC cannot track a majority of disguised remuneration schemes because they disappear quicker than you could imagine, they are going after those who have engaged with them for the underpaid tax and NI. Many workers have been required to pay back tens of thousands of pounds.

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