Disguised Remuneration Schemes – HMRC Prepare to Turn Up the Heat

On the 29th September 2017, HMRC published this article regarding the court’s decision in the high-profile tax-avoidance case involving Rangers Football Club. In their article, HMRC state their intention to use the ruling to take action against other disguised remuneration schemes.

Why is this important?

 In their article, HMRC state “In paragraph 39 of the Court’s decision, they set out the principle that employment income paid from an employer to a third party is still taxable as employment income.”

They go on to state their belief that this principle can be applied to a wide range of disguised remuneration tax avoidance schemes.

This is significant because it shows HMRC’s intention to use this ruling to take on other tax avoidance schemes, and with a growing weight of case law backing them up it’s practically inevitable that they will succeed.

How does this affect recruiters?

It is safe to assume that any disguised remuneration scheme will be challenged by HMRC, and it isn’t just the “user” of the scheme who will be affected. 

As a recruiter, it’s also likely that you will get caught up, particularly if you have referred contractors to the provider of the scheme. In some cases, you could even face criminal prosecution under the Criminal Finance Act that came into force at the end of September.

The public and the press have a well-established appetite for the downfall of “tax dodgers” so the damage to a recruiter’s reputation could be severe even if they avoid other consequences. It is therefore vital to take control of your supply chain and ensure you are only doing business with compliant suppliers. We recommend only working with FCSA Accredited Members as the best and most cost-efficient way of ensuring compliance across your supply chain. 

Where HMRC challenges a tax avoidance scheme, the likely outcome is that the scheme provider will cease trading, leaving the contractor with tax and penalties to pay and possibly other consequences as well. Needless to say, this will make retention of contractors difficult, particularly if you’re the recruiter who recommended the scheme. 

What should you look out for?

Disguised remuneration schemes attempt to avoid tax liability by diverting earnings to “disguise” them. Often the contractor would be paid in the form of a loan, which is often interest free and there is usually no expectation that it will be repaid.

Such loans have been taxable since the Disguised Remuneration rules came into force in December 2010, so the continued use of them could represent criminal tax evasion unless the amount paid is taxed as earnings. This is of particular concern to recruiters as it could leave them open to prosecution under the new offence of Failing to Prevent Tax Evasion.

What should you do if you’ve referred contractors to a disguised remuneration scheme?

 If any of your suppliers are currently running disguised remuneration schemes, our advice is to end those relationships as soon as possible, because they put your business and your contractors at risk. This will leave your contractors in urgent need of a compliant alternative. Using a Preferred Supplier List containing only FCSA Accredited Members will allow you to refer these contractors to trustworthy suppliers right away. In addition, your contractors should be advised to seek advice regarding their tax position as matter of urgency, as the sooner the issue is resolved the less they’ll have to pay in interest and charges.

If you have any questions about this issue, or if Orange Genie can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.

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