Jagriti Patwari of the Locum clinic lays out the different ways a locum could be paid, and warns of the dangers of using umbrella companies and offshore payment structures.
PAYE – ‘Pay as you earn
This is the national withholding system on payment of employment income.
Tax and national insurance is deducted at source before net income is paid to the employee. This system applies even if the locum is not directly employed by the agency or end user client as the agency is obliged to either operate PAYE or pay a limited company
PAYE is risk free for both the locum and the agency, as long as it is operated correctly
Limited company
Often locums set up their own limited companies to take payment. The advantages of this are that profits can be extracted tax efficiently and legitimate business expenses, such as insurance and professional fees, can be claimed. Using a limited company is a legitimate and appropriate form of taking payments tax efficiently if locums do not fall into the IR35 legislation. Some locum posts could fall into this legislation whilst others will not, hence it is important that the agency contract is ‘IR35 proof’.
Umbrella companies
Umbrella companies also operate PAYE. The main difference to the PAYE mentioned above is that umbrella companies offset taxable pay with non-taxable, legitimate business expenses e.g. travel and subsistence incurred when attending temporary workplaces. Typically, they will take a small fee for being paid though them. Many even guarantee that a locum’s take home pay will be higher when they are paid though the umbrella company compared to traditional PAYE.
The advantage of working though an umbrella company is that they employ the locum under an overarching contract of employment. The contract will guarantee a minimum number of working hours and confer certain employment benefits such as Statutory Sick Pay, Statutory Maternity Pay and Holiday Pay. The disadvantage of working though an umbrella company is, if they do not have a valid and appropriate P11D dispensation agreement with HMRC then additional tax liabilities might accrue. There is no way of checking whether an umbrella company has a valid and appropriate P11D dispensation. Furthermore, even if an umbrella company has had one in the past, it may no longer be valid.
Offshore payment structure
There are many offshore payment structures available in the market, where the agency makes a payment to an offshore company which then pays the locum 80–95% of their gross earnings. Although locums believe that their tax obligations have been fulfilled by this method, often the only charges that have been deducted are for ‘processing fees’ and insurance. Usually deductions for UK tax and National Insurance have not been made.
In the past, the double tax treaty between the UK and other countries allowed this type of payment structure to be widely used to legitimately reduce tax liabilities. However, the budget of 2008 introduced BN66 – ‘Double Taxation Treaty Abuse’ and these loopholes were ‘clarified’ as being unlawful. Furthermore, the Government has stated that tax avoidance by use of these loopholes is retrospectively unlawful. This is a major risk for agencies because of the ‘Transfer of Debt’ legislation. HMRC only need a handful of legal cases to pursue in relation to locums being paid through offshore structures, to financially endanger an agency. The UK legislation is clear. If a locum is a UK resident and works in the UK then (s)he will be liable to UK tax and national insurance.
The locum clinic is a one stop shop for all the financial planning needs of locums http://www.locumaccounting.co.uk/.
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