Top 4 non-compliant payroll models for contractors to beware

Being an umbrella contractor should be as easy as finding a job you can do and being engaged by a trustworthy employer to get fully paid for that work each week.  

Unfortunately, some people see the contracting space and its break from conventional work norms and patterns as their own opportunity. An opportunity to make fast money out of contractors and disappear! 

We believe it’s therefore important that the contracting world understands what some of these non-compliant and tax avoidance schemes look like, so you can protect yourselves from the likely ensuing HMRC penalties, writes John Bounds, a director at Rocket Paye. 

Here, then, are the top 4 non-compliant payroll models for contractors to avoid – and by ‘top’ I mean the most prominent and the worst. 

1. Mini-Umbrella Companies 

They might offer an outlawed method of payment but the Mini-Umbrella Company model, or ‘MUC,’ is active in 2024, and very much something contractors should wash their hands of.  

A MUC is in effect a scheme, whereby you are engaged by a UK limited company, that is completely different to the company you have engaged with to find work and usually has a foreign director assigned to it. 

The whole purpose of this limited company is to be small enough that it can take advantage of two legitimately available HMRC initiatives -- the Employment Allowance and Flat Rate VAT. 

When an agency sends your money to the Mini-Umbrella Company, the MUC will withhold the Employer’s National Insurance and take advantage of the VAT on a reduced rate, exploiting tax loopholes that exist in the current system.  

The likelihood is all of your MUC co-workers and colleagues are being engaged by different employers too, but actually, this provides you with a handy way of spotting whether you are part of this fraudulent model.  

2. Accounting Acquisition 

The next elaborate tax avoidance scheme we are seeing in the contractor market is called Accounting Acquisition, or sometimes ‘Tax Credits’ scheme.  

Under this ruse, the contractor is again employed by a different company to the agency or umbrella which they have engaged with, but usually by an employer with a name very similar to the agency. 

For example, if you are hired (legitimately) by Joe Blogs Recruitment Limited, you could well be employed by Joe Blogs Recruitment Solutions Limited. As you can see it’s a similar name but definitely not the same. 

The whole premise here, is for the payroll provider to avoid paying any Employer’s National Insurance or pension contributions. Then, a holding company steps in to pass down “tax credits” to a company in the group, which in our example is Joe Blogs Recruitment Solutions Limited (JBRSL).

Using the tax credits that have been applied for, JBRSL will offset any tax owed to HMRC, meaning the full contribution paid by the agency is now instantly profit! 

However, the way in which these ‘tax credits’ are obtained is the darkest element. These group companies will submit a tax submission which is legitimate, but will then call HMRC and claim they made a huge mistake -- and claim that they over submitted on their return. Of course, they didn’t. But none the wiser, HMRC will then issue them a tax credit, which is then what gets used to offset against the real tax that should be paid. 

As to how to detect whether this is an arrangement which you are unknowingly victim to, be aware that the Accounting Acquisition ruse needs a vast number of group companies to work effectively, en masse. 

3. False payslip issuing 

Much less niche than the Accounting Acquisition scheme, but just as non-complaint in terms of payroll, is False Payslip issuing, which rogue umbrellas indulge in.

  It’s a straightforward practice of a contractor being paid one amount, but their payslip and what is being reported read very differently!  The payslip will often show what looks to be legitimate deductions and a correct take-home pay, but what is received in a contractor’s bank account is often far greater than what the payslip shows.

This is a huge red flag and a sign of tax avoidance which should be reported straight away. 

In terms of detection this one is simple -- if the payslip doesn’t look right, or doesn’t match what’s in your account, be concerned! 

4. Payslip skimming 

This malpractice became a big stink in the umbrella company market towards the end of 2022, and rightly so as it’s where a contractor’s employment costs are opaquely grouped together on their payslip and read as one simple line such as “employers costs.”

Those “costs” have a monetary figure against them, and usually are made up of multiple deductions such as Employer’s NI, employer’s pension contribution, Apprenticeship Levy, and the umbrella’s margin. By narrowing this down to one headline cost, it leaves the brolly with an opening to insert ‘hidden costs,’ thereby generating extra income that the contractor has no real way of knowing about -- all because it’s nearly impossible to know what’s included in the “employers costs” line, and of course how much each cost accounts for. 

Not bothered by these four non-compliant payroll models?

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Unfortunately we saw the Accounting Acquisition scheme in full operation only this week, and shockingly, an umbrella notorious for payslip skimming is still drumming up new business as you read this! Be very careful out there contractors.