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The importance of using a reputable payroll provider as a contractor

Last updated on Wednesday, May 17, 2017

Written by Andrew Trodden

As a freelancer or contractor, it is likely you will set up your own limited company or work through a PAYE umbrella company. However, with so many providers of payroll services available, how do you know which one to use? Whatever your decision, make sure the company you use to take care of your payroll is reputable and compliant, or the repercussions could be devastating.

As a freelancer or contractor, it is likely you will set up your own limited company or work through a PAYE umbrella company. However, with so many providers of payroll services available, how do you know which one to use? Whatever your decision, make sure the company you use to take care of your payroll is reputable and compliant, or the repercussions could be devastating.

The two most popular payroll options chosen by contractors is operating through a limited company (often referred to as a personal service company) or using a PAYE umbrella company. Every contractor’s circumstances are different and depending on their salary, hours, contract length and preferences, one option may be far more suitable to one contractor than the other. However, regardless of the payroll service you choose, you must ensure they are reputable and fully compliant with HMRC legislation. 

Using a tax avoidance scheme is certainly a massive risk and one that we strongly advise against. You have probably noticed some organisations boasting about being able to guarantee you upwards of 90% wage retention. Whilst some of these schemes might not be on HMRCs radar for tax avoidance, rest assured they will be soon and in the future, you could be retrospectively punished for the time you have been using such services. HMRC has stated they are tirelessly investigating providers of schemes that they believe could be tax avoidance and if later on they decide a provider is guilty, the company and the contractors that have used it could face heavy penalties.

HMRC will not be vigilant if they decide you have been using a tax avoidance scheme. For example, if they deem you to have avoided £10,000 worth of tax, you will be required to pay them £10,000 immediately. This is not like a professional loan from a high street bank where you are able to pay back a scheduled monthly amount to reduce your debt; you will need to find the money immediately and therefore could face a significant financial crisis. 

There is a host of companies operating unethically and unlawfully that are targeting contractors. 

HMRC recently declared that job board schemes are tax avoidance. These schemes involve a contractor receiving a minimal salary paid into their bank account from an umbrella company, in order to reduce the tax and National Insurance Contributions (NICs). The rest of the salary is paid to a third party job board where the contractor’s skills are advertised. The contractor will earn credits for their listing and these are exchangeable for tax-free cash. Therefore, the contractor is receiving the rest of their salary without making tax or NICs, thus making it a tax avoidance scheme in the eyes of HMRC. If you are involved in such a scheme, you are urged to get in contact with HMRC to settle your outstanding taxes.

HMRC has warned of a similar scheme that also involves contractors receiving a split salary consisting of low pay, and the rest being paid to them as a "capital payment" for a deferred annuity (tax-free). 

You can find out more about tax avoidance schemes being investigated by HMRC here.

Churchill Knight & Associates Ltd is a leading contractor accountancy and PAYE umbrella company. Since 1998, we have helped over 20,000 contractors get paid on time and in full compliance with HMRC legislation. You can be assured that Churchill Knight is a reliable and dependable payroll provider. If you would like to discuss setting up a limited company or joining an umbrella company, or you are looking to switch provider, please call 01707 871622 or contact us here. When you use Churchill Knight you will have complete peace of mind.

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