“Ghost payroll”: new tax avoidance scheme coming after contractors and recruitment agencies
The contracting sector is constantly evolving, and unfortunately, not all developments are for the better. Professional Passport, a payment intermediary and umbrella compliance adviser, has sounded the alarm about a new form of tax avoidance known as “Ghost Payroll”. These schemes pose serious risks for unsuspecting contractors, who may find themselves unwittingly entangled in fraudulent activity.
How Ghost Payroll Works
These schemes typically involve an employer either funnelling payments through an undisclosed secondary company or operating a hidden payroll to conceal the true taxable income of contractors.
What are the red flags?
Red flags for contractors include:
- discrepancies between contract details and actual payment sources
- payslips that show taxable pay at or near the National Minimum Wage despite higher assignment rates
Remember, ignorance is no defence. HMRC has sophisticated methods for detecting tax avoidance, and contractors who are found to be involved in such schemes may face penalties.
“Umbrella Brokers” acting as fronts
The rise of Ghost Payroll has been linked to the proliferation of “umbrella brokers”, some of whom may be fronts for disguised remuneration schemes, according to Professional Passport. While the onus for correct PAYE operation lies with employers, contractors can also face consequences if caught up in these arrangements.
Protect Yourself
As a contractor, it’s crucial to be proactive in ensuring your payment arrangements are legitimate. If something seems off, don’t hesitate to ask questions or seek advice. Remember, ignorance is no defence. HMRC has sophisticated methods for detecting tax avoidance, and contractors who are found to be involved in such schemes may face penalties.
Crawford Temple, CEO of Professional Passport said: “The Ghost Model is a new and concerning development for the umbrella industry. However, ignorance is no defence. The landscape has shifted. It’s no longer a question of if HMRC will detect these schemes, but when. Contractors need to be proactive in ensuring their payment arrangements are above board.”
Ignorance is not bliss
“If, as a contractor, you were duped into an arrangement and had no idea that something untoward was happening then there is a potential defence, but this is undermined where there is a track record of using multiple arrangements,” said Temple.
Temple told The Freelance Informer that contractors should secure their new umbrella before switching, since that “would be reasonable” and they would be allowed a reasonable time to take the action.
The transition should be fairly seamless, he said, and they would not be out of pocket. “The agency has a duty to ensure workers are paid in a timely manner,” said Temple.
For Recruitment Agencies
Recruitment agencies play a vital role in connecting contractors with employers. It’s essential to conduct due diligence on any umbrella companies or payment intermediaries you work with. Ensure they have a solid reputation and are compliant with all relevant regulations. Remember, your candidates trust you to guide them towards legitimate and safe employment opportunities.
“Legitimate umbrella companies should offer similar returns, with only minimal fluctuations in take-home pay. Any promises of significantly higher returns should be viewed with caution,” warned Temple.
Key Takeaways:
- Scrutinise your payment arrangements carefully
- Be wary of promises of significantly higher returns than the market average
- If something seems suspicious, seek advice
- HMRC is actively looking for tax avoidance schemes
Temple said if you receive a letter from HMRC suggesting your provider may be operating a disguised remuneration scheme you should “immediately take steps to remove yourself from the scheme.”
By doing so, you can show that as soon as you became aware you took action, but it is difficult to use this defence where there is a track record of using multiple schemes. Contracting and using an umbrella company for the first time can be complex, but by staying informed and vigilant, you can protect yourself from the risks associated with Ghost Payroll and other fraudulent practices.
HRMC says beware of digital employment contracts
Be extremely cautious of digital employment contracts where the detailed terms and conditions are found in a separate document or a hyperlink that cannot easily be accessed, printed or saved. This could be to stop you from knowing the exact arrangements and how you will be paid by the umbrella.
Make sure you:
- Get an employment contract.
- Read all the details in your contract.
- Do not sign up for anything you are uncomfortable with or do not understand.
- You should keep a copy of your contract — so it cannot be changed without your agreement at a later date.
If you’re asked to sign more than one document
Your umbrella company may ask you to sign another type of contract or agreement in addition to your employment contract — this can be a sign of a tax avoidance scheme.
If you’re offered an ‘enhanced’ option
You may be offered a choice between ‘standard’ or ‘enhanced’ arrangements. They may be described as tax efficient. The enhanced option may mean the umbrella company will deduct a higher margin or fee from the amount of money they are paid by the recruitment agency or end client, before passing the money on to you. This is likely to be tax avoidance.
Umbrella companies offering higher take-home pay
Some umbrella companies frame things in terms of their workers receiving a specific amount or percentage of take-home pay (such as 80%). These are likely to be tax avoidance schemes. When you see such offers remember that the basic rate of Income Tax is 20% and you also need to pay National Insurance contributions on top. Use HMRC’s online tax calculator to check how much tax you should expect to pay on your earnings.
Related articles
Umbrella industry left unregulated for another year – Freelance Informer
Q&A: Protecting Contractors from Umbrella Company Abuses and Opaque Rates – Freelance Informer
Dwindling self-employment: is it killing our economy? – Freelance Informer
