Tell-tale signs you’re using a tax scheme, not an umbrella company
Fast-approaching April 6th 2022 heralds a new tax year and over the coming weeks it would be prudent for contractors, in particular those operating through umbrella companies, to carry out some important checks to ensure their tax affairs are in order, writes Crawford Temple, CEO of Professional Passport, the UK’s largest independent assessor of payment intermediary compliance.
So umbrella contractors, are your tax affairs in order?
Since the introduction of off-payroll working rules in the private sector, there has been a steep rise in disguised remuneration schemes operating under the guise of umbrella providers. While some of these are simple to spot, others are more devious in how they operate and have hoodwinked many unwitting contractors into signing up for their dodgy schemes.
By carrying out some simple checks of their own, contractors can take control of their personal affairs and get the reassurance they need that all is in order.
A number of the disguised remuneration schemes operate by reclassifying income into some non-taxable category. These usually take the form of loans, growth shares, annuities, and capital investments. Regardless of the label, these are unlikely to be accepted as genuine by HMRC and will result in additional tax liability for the worker, as we have already seen with the loan charge.
The tax bills faced by contractors under the loan charge were significant as, for many, these had been accumulated over several years. Many contractors believed that the loan charge scheme must be legitimate otherwise HMRC would have acted sooner. Unfortunately, that was not the case. It can take HMRC a few years to identify these arrangements and follow up with the beneficiaries. When they do, those engaging with such schemes will face multiple years of tax liabilities in one lump sum, which can have a dramatic impact on your circumstances.
Simply compare the amounts
A common theme across many of these arrangements is that the amount of money received will be greater than the amount reported on the payslip, as well as the amount reported to HMRC.
If you regularly receive more money into your bank than is stated on your payslip, you are likely to be in one of these arrangements. The difference between what is received and reported will be the amount that HMRC seeks additional tax on.
We often hear reports from workers that they do not receive a payslip, usually when involved in one of these arrangements. But it is illegal not to provide a worker with a payslip, so:
- Be sure to obtain a payslip. If you haven’t received one, ask.
- Check your payslip each month comparing the amount received with the amount reported on the payslip. If you receive more than reported, you are likely to be in a disguised remuneration scheme.
- If that is the case, write to the provider highlighting the issue and ask them to re-calculate your income correctly with full PAYE applied. This may mean that you must cover some additional taxes and have a reduced income for a period but at least your affairs will be in order. Some providers may cover some of the unpaid taxes to keep you ‘sweet’ -- and quiet -- because they fear being reported to HMRC.
We have heard many examples where the income received by a worker is more than the amount that has been reported to HMRC. In extreme cases, workers have received their payslips showing what appears to be correct amounts and deductions which also corresponds to the amount they receive into their banks. Where the payslips and income received all match, then on the surface all may appear correct.
There are some simple steps you can take to confirm this in advance of the tax year-end.
- Register for your own tax account at https://www.gov.uk/personal-tax-account.
- Once registered you will be able to see the amount that HMRC has had reported to them as your income and the tax deducted.
- If you find a difference between the information you have and what HMRC has, then alarm bells should start to ring. In the first instance contact the provider in writing to ask why this may be the case. If you are unsatisfied with the answer, contact HMRC directly.
Where a provider is knowingly providing a contractor with incorrect or misleading pay statements (as they are not matching the reporting to HMRC), this could be seen as fraud and have very serious implications for a provider. However, we know that many continue to operate and HMRC is slow to address the problem.
Regardless of your situation, we would advise all contractors to register for their own tax account with HMRC. This allows you to regularly check, within a few key clicks, that the information HMRC holds on your earnings and taxes paid matches the monies you have received and your expectations. Where you are using a compliant provider, you will find this to be the case and you can rest easy having had this verified.
This simple check will help you to confirm your provider is operating correctly. Where this is not the case, the earlier you discover this the less painful it is to resolve. It will certainly help you to avoid any year-end surprises and unexpected tax demands landing on your doormat.
If you find any discrepancies that you are unsure about you can contact our organisation and we will try to assist. Have ready for us copies of documentation which we will need after you inquire – but hopefully the guidance herein will help you iron out any anomalies so that your tax affairs are in order for 12 weeks’ time, and beyond.