Defining Disguised Remuneration: a contractor’s guide to sniffing out concealing money paid

Everybody knows what Disguised Remuneration is.

Or rather, everybody who works in the contractor sector for even a short amount of time will soon come to know what Disguised Remuneration probably is.

Disguised Remuneration, whose definition will you use?

We can go further. Many contractors often develop their own individual idea of what Disguised Remuneration (DR) is, writes Graham Webber, director of tax at WTT Group.

All those who are intermediaries in the contracting supply chain also tend to have a description of what DR is. Where the term came from originally -- HMRC, even offers us several definitions of Disguised Remuneration. But not insignificantly, those official definitions don’t always fit legislation or decided cases.

You’re excused. Potentially…

So taxpayers and hard-working contractors can perhaps be excused for not always fully understanding what Disguised Remuneration is or entails, right off the bat.

What is inexcusable, is any attempt by those who do have a good idea of what is meant by DR, to claim that their offering, or participation, is not captured by the tax or anti avoidance rules that prohibit it.

Indeed, a legal-esque or tax-type definition of DR offered up here would unfortunately serve as invitation to those who do want to offer abusive products or solutions to play a semantic game, and then go off to claim to contractors that their arrangement ‘escapes’ my invariably narrow description.

Instead, I want to reduce the definition of DR, and what Disguised Remuneration looks like, to the lowest common denominator, while providing some practical guidance for contractors genuinely trying to avoid a Loan Charge 2.0-type ordeal.

What does the ‘Remuneration’ in ‘Disguised Remuneration’ really mean?

Let’s start with “remuneration”.

The Oxford English Dictionary defines remuneration as “money paid from work or service”. That is helpful, insofar as it says “money paid”.

It is less helpful in saying “work or service”.

‘Money paid’ is perhaps best understood by looking at your bank account after a period of work. Has the credit balance increased and if so, by how much? Has it increased because you did the work? Is there a direct link between the work you did, and the credit to your bank account? In other words, if you had not done the hours or work, would your bank account have increased?

‘Loan,’ ‘conversion,’ ‘annuity,’ or ‘investment’? Read on for the ‘disguised’ bit…

If the answer to all the above is that you have received money, chances are that it is remuneration.

But if it can then be said that the money is a loan; arose from the sale of an asset, the cashing in of an ‘investment’, even the conversion of an annuity, chances are that you need to keep reading to grasp the below bit about “disguised.”

Spoiler alert! If the single most compelling reason why you have received the money is because you worked and supplied your services, arguing that it is not remuneration is almost impossible.

Questions, tax terms and systems

Accepting (as I recommend that you do) that remuneration is indeed money-paid, then you must ask - Why was it paid?

In tax law, “work” and “service” can mean different things depending on context. Generally employees “work” and the self-employed supply “service”. While that is a simplistic description that will not hold in all cases, it gives the correct sense of where most contractors will sit.

An employee – or a person taxed as an employee – will usually be subject to deduction of tax at source. This is the Pay As You Earn (PAYE) system, operated by the employer.

By contrast, a self-employed person will usually be paid without deduction of tax and will be required to make a declaration of income/profit via a tax return and pay taxes to HMRC later.

Surely Disguised Remuneration cannot apply to the self-employed?

It is tempting therefore to think that by being self-employed, the tax rules around Disguised Remuneration cannot apply. That would be a false position. The determination of your “status” (i.e. employee or self-employed) is not within your gift to determine. Nor is it with the end-client, your agency or accountant, and neither is it with HMRC. It is a question of fact.

You need to look at the circumstances under which you work or supply a service and apply a set of rules. These are very similar to those used by an end-client to determine inside or outside IR35 status. But they also have some key variations.

Ultimately however, if the end-client determines what you do, when you do it, how it is carried out and what standard is acceptable, chances are you are an employee. If you have a contract for a determined set of services which sets out a timeline for delivery, minimum standards and which ends when those services are complete, chances are you are self-employed.

Space here is too limited to go into more detail, but be aware that this is a question that requires expert analysis to reach a definitive answer exceeding the quick parameters set out above.

It is also the case that whether you are employed or self-employed, tax rules exist to ensure that the reward you receive is taxable.

What does the ‘Remuneration’ in ‘Disguised Remuneration’ really mean?

The word “disguised” presents similar problems.

Firstly however, it is not a word that appears in the legislation, but it is one that is in general use by all parties in the contracting sector.

The Oxford English Dictionary tells us that (as a verb), “disguised” means to “give a difference appearance in order to conceal”.

In the context of the intent of the tax legislation and the decided cases in this sector, that is a very, (very) good start.

The Rangers case

Most historic examples of what is described as Disguised Remuneration seek to pass off a payment for work as some form of “loan.” The idea of being granted a loan in exchange for work done has been debunked in cases in tribunal for many years, and culminated in the ‘Rangers case’ handed down by the Supreme Court in July 2017. That judgment confirmed that payment for work done is remuneration regardless of what disguise gets adopted (in ‘Rangers,’ a loan from a trust).

More recent examples have seen claims that a work contract which “defers” payment, but advances a loan in lieu, will not be caught.

We’ve seen ‘annuities,’ ‘share options’ and ‘investments’ in sister companies plus various types of exotic investments, all used to disguise what is, despite a cloak of some sort thrown in to divert attention, payment for work done. None of those ‘mechanisms’ will escape the anti-avoidance rules in place, backed as they are by decided cases from the Supreme Court down.

Re-introducing the contractor’s guide to stay safe in a HMRC-policed world of DR -- the sniff test

A common-sense approach is always best.

If you know that after agent fees or similar, you expect a gross fee of £x, and that you are to be taxed as an employee (inside IR35), then you must see between 60% and 68% of that amount hit your bank account as remuneration.

Regardless of the description of that sum – or the ‘label’ ascribed to it, your next step should be to check that the difference between 100% of the day rate and what you have to use as you wish, is actually tax -- not fees to an intermediary. That is not always easy and some expert help may be required.

Contractors, there’s no valid tax reason why your payment should be two-fold

If payment arrives in two parts, this is a pointer toward a ‘disguise’ being applied. There is no valid tax reason why payment should be in two or more parts. You do not perform two roles or provide two sets of services, and therefore payment in two (or more) parts is counter intuitive.

Again, common-sense is your guide.

If you are required to sign more than an agency contract and a services contract, likewise, a pointer toward a ‘disguise’ is in place. Deploying again that trusty sniff test tells us that the transaction you are part of is simple -- you work and the end client pays -- it does not need a complicated series of documents. 

A disguise, why bother?

The key point here for many contractors who end up stung is that the payment received for work is not described as that, but as something else -- it is disguised. Why? Well, because those who would sell tax avoidance products know that without such ‘labels,’ their scheme is paper thin in terms of protection from even a cursory HMRC enquiry.

Looking a little wider, participation in any scheme that is Disguised Remuneration, either immediately obvious or decided considerably later after HMRC enquiry and perhaps thousands of (non-tax-deductible) pounds in fees, damages the entire contracting sector.

The key reason for the introduction of the rules here, now – post reform – in the shape they were originally intended – was to prevent the loss of tax. That loss was because in 2000, the differential between tax paid by employees and that paid by the owner of a personal service company, was perhaps upwards of 18% of gross pay. That differential is now much narrower, but the perception that being self-employed or working via a company offers “better” take-home pay, persists.

The long tail, and a new head

For so long as contractors try to “disguise” their reward for work in an effort to escape tax, and the mechanisms to conceal payment for money paid are offered, we will see anti avoidance legislation applied. And with some prejudice.

In many cases, post-reform of IR35, the decision as to how reward is taxed has been removed from the contractor. It’s now in the hands of the end-client and agency. Beware. There remain instances where an end-client is prepared to reduce their costs by claiming payment for work is something else, often aided and abetted by an agency. If you are in any doubt, or something is failing the common-sense sniff test, ask an independent expert.