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Spotlight on Umbrella Schemes

Some umbrellas may be a Pandora’s box

HMRC are warning contractors that signing up to umbrella companies that promise to increase take home pay by anything ranging from 80–95%, is just storing up trouble later down the line.

In HMRC Spotlight 45, the department explain that whilst the majority of employment agencies and umbrella companies act compliantly, there are some that misleadingly promote arrangements that promise great rewards in a ‘tax efficient’ or ‘legitimate’ manner. Beware however, as tempting as it may be to pay less tax now, you could pay a whole lot more in years to come as HMRC will always challenge tax avoidance schemes.

How it works

Whilst arrangements may differ from scheme to scheme, the promoters claim they will help contractors retain more of their income and reduce their paperwork.

Needless to say, a large part of the remuneration paid to the freelancer is in a so-called non-taxable form such as a loan, credit or something similar. HMRC, on the other hand, will treat such payments no differently to normal income and maintain that tax and NIC is payable.

Contractors wanting to work for these companies may be told that they have to sign up to these arrangements first. Where this is the case, then independent professional advice should be taken before committing, so that a freelancer is aware of what they are getting themselves into.

Remuneration

Fraction of salary paid net of some tax & NIC
Larger payment free of tax and NIC, i.e. gross from a different account (possibly overseas)
Payslip describes gross payment as something other than pay

Sometimes payment will go through a chain of various companies before it finally reaches the worker.

These companies may well claim that they are compliant with tax rules, but a contractor should not simply accept this at face value, as the associated risks are not always explained, or the fact that they involve tax avoidance is masked. Past users of similar schemes were told that their arrangements were HMRC compliant only to discover, to their detriment, that this was false.

Where HMRC successfully challenge these schemes, then participants, past and present, could end up paying additional tax, NIC, interest and penalties. HMRC are therefore advising these people to get out now and settle their tax affairs with the department.
Anyone concerned about their involvement in one of these schemes are invited to contact HMRC via e-mail at exitsteam.counteravoidance@hmrc.gsi.gov.uk.

If someone is aware of these types of schemes and would like to share information with HMRC, then details of how to do this can be found here Report tax avoidance.

By Qdos Contractor

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2 thoughts on “Spotlight on Umbrella Schemes”

  1. Andrew Harrison

    HMRC is stating the obvious. I used to have an email folder full of “too good to be true offers”. I would have forwarded them to HMRC if they provided an email address. I always thought HMRC should proactively shut down the proposers of such schemes, maybe they did as I haven’t had many such emails recently.

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