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Posted 24th August 2018

Government releases guidance on unscrupulous umbrella companies

Yesterday the government released guidance for contractors on what to do if they find themselves registered with an ‘umbrella company’ who are operating a tax avoidance scheme. This included how a contractor could identify that they are working with a suspect company and what they can do to stop themselves from being pulled into the scheme.

umbrella companies

Despite the warnings given to contractors within the guidance, HMRC does in fact state that the majority of umbrella companies are working compliantly within HMRC tax regulations, with just a select few companies operating outside of tax rules.

HMRC has pointed out that umbrella companies offering to save contractors’ tax or that make promises that you can keep 80, 90 or 95% of wages whilst remaining tax compliant, are almost certainly running tax avoidance schemes.

Contractors must understand how to identify these companies and cease any work with them, as it will not just be the umbrella company themselves that are penalised, but the contractor too. This is due to the fact that contractors are, in the eyes of HMRC, ultimately responsible for their tax and National Insurance contributions. If found to have been a part of this type of arrangement, a contractor will find themselves liable for paying tax owed, additional interest and could be presented with financial penalties.

Identifying tax avoidance schemes

Contractors can identify an umbrella company operating a tax avoidance scheme in a number of ways, including but not limited to:

  • The company claims their service allows you to pay less tax, compliantly
  • States you will take home over 80% of your wages – income tax is typically 20%, therefore, anything more than 80% will not be correct tax
  • A company that claims their payment to you is not taxable as it is instead a loan, credit or similar, rather than income
  • You receive a small payment with tax and NI deducted then a subsequently larger payment without deductions
  • And many others

Working with a compliant umbrella company

If you suspect you are using an agency with this tax avoidance model, call us as soon as possible and let us review your situation for you. Services that appear too good to be true almost certainly are, therefore as long as you know the key identifiers to avoid these types of companies you will enjoy a lucrative yet compliant contracting career.

Exchequer Solutions prides itself on providing a compliant service to contractors and agencies alike. We do not operate a loans system and condemn those companies that do, as this will more often than not negatively impact the contractor. Speak to our team today to find out the benefits of being registered with a compliant, customer-focused umbrella company.

For more information on this issue, read the full government guidance to non-compliant umbrella schemes here.

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