What is disguised remuneration and why should you avoid it?

 In Bookkeeping, Contractors, Freelancer Accounting, Tax

Disguised remuneration has been around for a while. However, it hit the headlines recently as the government announced a new crackdown initiative.

Here, we’ll explain what disguised remuneration is. Then we’ll explain what the government is doing to clamp down on it and how contractors can legally maximise their earnings.

What is disguised remuneration?

Disguised remuneration is the process by which employers pay contractors part of the amount due for their services in the form of a tax and interest-free loan.

It is hypothetically repayable, although this rarely happens in practice.

In December 2010, the government brought in new disguised remuneration legislation in a bid to kill off the practice going forward.

However, as of April 2019, disguised remuneration loans issued between April 1999 and December 2010 will also become taxable. On top of this, the taxman will be seeking to claw back all interest and late-payment penalties relating to these loans.

This is likely to prove costly for many contractors. Even those who stopped the practice after the initial ‘warning shot’ in 2010. Some contractors may even slip into bankruptcy as a result of this change.

Contractors who used disguised remuneration within this time frame should seek specialist advice from experienced contractor accountants and look to settle any outstanding amounts in advance of April 2019.

If you’ve been issued an employee loan that’s been paid back via salary deductions, the new rules will not apply to you.

How can contractors legally maximise their earnings?

Putting disguised remuneration to one side, contractors can still use these options to legally maximise their earnings:

1) Tax credits, relief and deductions

Chances are you’re eligible for some form of tax credit, relief or deduction. These could all help minimise your overall tax bill.

However, the landscape is complex and constantly changing. So you might well miss out on claiming for an amount (or amounts) that you’re technically due.

Draft in a specialist contractor accountant with a detailed knowledge of tax credits, relief and deductions. They will help ensure you’re claiming everything that you’re eligible for.

2) Administration time

You’ll struggle to operate as a contractor without having defined financial administration processes in place.

However, when you’re running the numbers yourself, it can be time-consuming and you could miss strategic insights that could help optimise your profitability.

Use advanced accountancy software – such as FreeAgent or Xero – to cut this administration time, maximise your working capacity and make strategic cost savings.

3) Income streams

You can potentially increase your overall income by thinking about monetising your skills and approaching companies in a different way.

Use the specialist skills you’ve acquired while working on a project to offer training or consultancy to the same company once your contract comes to an end.

Think about where your skills could be used elsewhere within the company and pitch for work there. Different departments often have separate budgets and varying needs.

With the April 2019 disguised remuneration deadline fast approaching, you should act now to get your contractor finances in order. You can then try to use these other methods to legally maximise your earnings.

Find out more about disguised remuneration and other potential financial pitfalls by calling on the experts at 3 Wise Bears.

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