HMRC warns contractors on take-home pay, as ‘second wave of IR35 reform’s impact’ hits

Unusually high take-home pay for contractors is the focus of a flurry of HMRC resource activity, being deployed by tax officials as private sector IR35 reform nears.

Firstly in ‘Tax Avoidance: Don’t Get Caught Out,’ HMRC features IT project manager ‘Duncan’ recalling how a broker site led him to an umbrella company which ‘ended him up’ on scheme with an “unexpected tax bill.”

Secondly, launching a tie-up with the UK’s ad watchdog which will require promoters to flag up consequences of scheme usage in their online promotions, HMRC said inflated take-home (“say 90%”), was a red flag.

'Second wave of private sector impact from off-payroll'

And in a new HMRC report highlighting both the Loan Charge and NHS returners being targeted, the Revenue links to February guidance on “wrong” pay claims, saying it is still “useful” to agency contractors.

“Good for HMRC to focus on umbrella compliance as the second wave of private sector impact approaches from the off-payroll reforms,” says JSA Services’ Chris James.

“Clear and understandable advice from HMRC on this subject which compliant providers and agencies can use to explain what contractors should be steering clear of [is welcome].”

JSA’s director of services, Mr James agrees with HMRC’s implication – that take-home being too high is the “simplest evidence something’s wrong.”

'They're never what they seem'

But referring to HMRC’s case study of Duncan, an umbrella company boss said the spurious often begins before contractors can even get to size up an individual provider’s claims.

“I’m glad to see that HMRC are taking note of the ‘broker’ sites,” says Lucy Smith, owner of Clarity Umbrella. “The likelihood is they are never what they seem.”

In an earlier HMRC publication, Spotlight 55, contractors are warned that adverts for umbrella companies, when listed on comparison sites, are “not always legitimate.”

'HMRC cannot tell you'

The spotlight continues: “Some comparison websites and third-party brokers may offer both compliant and non-compliant arrangements.

“Non-compliant arrangements are sometimes called ‘advanced’ or ‘enhanced’ umbrella services.

“[But] HMRC cannot tell you whether a comparison or broker website is promoting a legitimate umbrella company.”

'I'll match you with one of my 20 umbrella partners'

In the spotlight, issued just after IR35 reform was meant to take effect a year ago, HMRC advises contractors to “always ask for a full and transparent breakdown of all deductions”.

But in one broker’s email to contractors, obtained by ContractorUK, the fast pace of the process suggested by the broker does not sound as if there would be time for such due diligence.

“Provide your day rate the best phone number to reach you on and I'll match you with one of the 20 umbrella companies I've partnered with,” instructs the pitch, breathlessly.

'Hoodwinked'

At JSA, Mr James advised contractors directly: “If you're looking at working through payroll as a result of the off-payroll reforms, don't make your situation worse by using a ‘high take-home pay’ solution.

“Remember, you can't be 'partly' on-payroll - you're either on it or not, [although we accept] that some will be on it, who don't think they should be. If it turns out you were hoodwinked, HMRC will still ask you for the tax that wasn't paid.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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