Chris Bryce – Chief Executive, FCSA
The Two Payment Method is a tax avoidance scheme some rogue umbrella companies use; it is a form of tax avoidance and is unlawful. Under this scheme, contractors receive payment twice for each payroll cycle: once at the National Minimum Wage (NMW), subject to PAYE tax and National Insurance, and once as a non-taxable payment. Sometimes, the umbrella company will refer to the second payment as an advance or a loan. However, it is just a tactic to avoid paying the proper tax on the contractor’s earnings. Sometimes the second payment is even documented on the same payslip as the fully-taxed NMW payment. If a contractor sees this, they should contact their provider straight away and challenge this arrangement, or they can upload their payslip to our verification service for FCSA to examine.
We ensure that our members are not using or promoting this method. We have several checks in place to identify and prevent tax avoidance practices, including regular assessments of our members’ pay records and procedures against our codes of compliance by independent assessors.
We are confident that our checks and procedures detect if the Two Payment Method is being used. However, we encourage contractors to be aware of this scheme, check with their umbrella company, and check their payslips.
How Contractors Can Avoid It.
Here are some tips for contractors to avoid the Two Payment Method:
- Ask your umbrella company about their payment methods. Ensure you understand how you will be paid and that you are not being offered a non-taxable payment.
- Check your payslip carefully. Make sure that all of your earnings are being taxed through PAYE.
- Be aware of the signs of the Two Payment Methods. If you are offered a non-taxable payment or your payslip looks unusual, be suspicious. Contractors may be required to pay back the money to HMRC.
- Use an FCSA-Accredited umbrella
How would HMRC know?
From an accounting perspective, there is often little effort made to hide or disguise these payments. It is obvious to anyone with a bit of tax and employment knowledge that this method is being used; however, it may not be evident to those without expertise. I encourage contractors to remain vigilant.
HMRC has a number of ways to know if contractors are using the Two Payment Method. These include:
- Real-Time Information (RTI). As per the RTI guidelines, employers must provide HMRC with details of all payments made to their employees, along with the amount of tax and National Insurance deducted. This enables HMRC to identify any potential instances of contractors receiving payment through the Two Payment Method.
- Recruitment agencies. To ensure compliance with tax regulations, recruitment agencies must submit quarterly reports to HMRC that outline the payments made to umbrella companies on behalf of their contractors. This data is used by HMRC to identify any contractors who may be receiving payments that are not subject to tax.
- Audits. The HMRC conducts regular audits on umbrella companies to ensure they comply with tax laws. During an audit, the HMRC examines the company’s payment records and other documentation to verify if the Two Payment Method is being followed.
- Tips from the public. HMRC ent also receives tips from members of the public regarding potential tax evasion schemes. If you suspect an Umbrella company is utilising the Two Payment Method, you can report it to the HMRC through their Tips program. It is important to note that any reports made are kept confidential.