As a recruiter, you’re not necessarily able to give tax advice to your contractors, but what if they’ve received an unexpected tax bill relating to work that they completed for your recruitment agency? In this article we’ll look at the reasons why this might happen, and what you should do if it does.
Why your contractors might receive a tax bill
For the purposes of this article, we’ll assume your contractors are PAYE based, either through your agency or via umbrella company employment. Those who are contracting through their own Limited company should raise any tax queries with their accountant.
So, if a contractor is engaged on a PAYE basis, why might they receive a tax bill?
An error has been made
If the tax bill is the result of a payroll error, for example if an incorrect tax code was used, it will usually be up to the employer to rectify. This will usually mean either your payroll department, or the umbrella company will be informed at the same time as the contractor.
The have untaxed income
If your contractor has additional income that has not been taxed, for example from rental property or other investments, they may legitimately have tax to pay. This obviously has nothing to do with their work with your agency.
A tax avoidance scheme has been used
This is the most common reason for PAYE contractors to receive an unexpected tax bill. The main problem with tax avoidance schemes is that the vast majority don’t work, and it’s often the contractor who suffers when HMRC catch up with them.
There are a great many tax avoidance schemes, and they use many different methods, but the most common is “disguised remuneration” which involves paying part of the contractor’s pay as something else – for example a loan – which the scheme runner claims is tax free. When HMRC inevitably investigates, the contractor and possibly you or your client will have to pay the unpaid tax, including interest and penalties.
Advice for your contractor
If your contractor has received a tax bill, it obviously needs to be dealt with, but the specific action they need to take will depend on what’s happening. If they believe it’s incorrect or they don’t understand it, we’d advise them to seek expert advice. If they’ve been involved in a tax avoidance scheme it’s even more important that they urgently speak to a specialist.
Advice for you as a recruiter
Obviously, you will want to help your contractor but unless the bill is a result of a payroll error made by your agency there’s a limited amount you can do, other than signposting them to expert advice. However, if it’s a result of tax avoidance at an umbrella company you’re still working with, there may be urgent action that you need to take
If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.