Tax campaigners welcome disguised remuneration proposals

However, LITRG has also cautioned that, until reforms are implemented, workers may still find themselves inadvertently caught up in disguised remuneration. LITRG is reminding workers of the support available to help them find a good, compliant umbrella company if they need one.

The government’s consultation¹ contains several policy options² to tackle tax non-compliance in the umbrella company market, including disguised remuneration.

Disguised remuneration (DR) is where a worker is paid their wages in the form of a minimum wage element that is taxable and a non-taxable element such as a ‘loan’ or a ‘grant’.

Paying a worker through DR may artificially lower the tax they pay, leaving them vulnerable to HMRC compliance action later down the line. But it can also benefit the umbrella company, as much, if not more as it benefits the worker. LITRG understands that many workers are increasingly being paid via DR schemes with no understanding at all of the set-up. There is little disincentive for non-compliant umbrella companies under the current approach, as they know any subsequent compliance action will most likely be directed at the worker rather than them.

LITRG highlights that options one and two in the consultation relating to tackling tax non-compliance, while allowing good umbrella companies to subsist, would significantly reduce the chances of non-compliant umbrella companies entering labour supply chains in the first place, protecting workers from getting caught up in DR.

Victoria Todd, Head of LITRG, said:

“Disguised remuneration is an insidious issue. As well as being a problem for HMRC in terms of the tax that is lost, it has a significant impact on the life and well-being of those low-income workers who may find themselves being paid via DR through no fault of their own.

“We are pleased that the government seems to have listened to many of our concerns³ and are taking steps to deal with the problem of disguised remuneration appropriately and robustly.

“It is important that once the consultation closes, decisions are made and implemented as soon as possible.”

Given the DR arrangements that LITRG see today are no longer always, or mainly, an issue of traditional tax avoidance, they say it is not fair or effective for HMRC to continue to try tackling current DR in the current manner, for example by focusing on taxpayer behaviour. The group therefore welcomes the consultation and the options, which seek to change incentives and behaviours throughout the entire supply chain. The group says this shows that HMRC are now thinking more holistically about the issues and possible solutions as well as through more of a consumer protection lens.

Victoria Todd continued:

“While the consultation progresses, we would urge HMRC to consider what more they can do to respond to the current state of affairs in the short term. In particular, we think HMRC could do more to improve their communications with umbrella workers to reflect the reality that many individuals are involved in DR inadvertently, rather than by choice in an attempt to avoid tax.

“In the meantime, umbrella company workers should be aware that until any proposals are actually enacted, they remain at risk of being caught in these schemes.

“The best advice we can give them is to check LITRG’s guidance on working through an umbrella company to maximise their chances of finding a decent, reliable and compliant one that will not pay them through DR⁴.”

Notes for editors

1. Consultation: Tacking non compliance in the umbrella company market.
2. Option 1 is the introduction of a mandatory due diligence requirement, with penalties applying to those employment businesses or end clients that do not comply. Option 2 is a debt transfer provision which would allow HMRC to transfer umbrella company tax debt from another business in the labour supply chain, in specified circumstances. Option 3 would deem the agency that supplies the worker to the end client to be the employer for tax purposes.
3. See our submissions in 2020 to the call for evidence on disguised remuneration, in 2021 to the consultation on clamping down on the promoters of tax avoidance and in 2022 to the call for evidence on the umbrella company market. 
4. See our guidance, including a link to a factsheet and an article called ‘Finding a good umbrella’.