Published on the 25th of August 2022, HMRC released new guidance to help educate agency workers and umbrella company employees about the risks of non-compliant payroll arrangements. The guidance includes helpful information to help contractors and freelancers make better decisions regarding their payroll, including the importance of receiving a Key Information Document before committing to a payroll provider and the signs of a common tax avoidance scheme. Keep reading for more information and news on the latest HMRC list of named and shamed tax avoidance schemes.
Introduction
Most UK-based umbrella companies offer a compliant PAYE payroll service for temporary workers. However, it’s important you can identify the signs of a non-compliant umbrella company (tax avoidance scheme) to ensure you pay the correct tax and National Insurance Contributions (NIC) – to avoid a potential HMRC tax investigation in the future.
While the umbrella company sector is technically unregulated, temporary workers must use compliant services because they are responsible for paying the correct taxes and NI. Therefore, even engaging with a non-compliant umbrella company by mistake could land you in serious trouble.
HMRC has issued numerous pieces of guidance over the last couple of years to help temporary workers and staffing agencies understand the tell-tale signs of tax avoidance schemes and the risks of engaging with them. Remember, HMRC will never actively endorse or promote any specific umbrella companies, so warning sign number one of a tax avoidance scheme is any company that makes claims such as “we’re HMRC approved”.
For the official guidance, please visit the government’s website and read: Warning for agency workers and contractors employed by umbrella companies (Spotlight 60).
The warning signs of tax avoidance schemes
The latest government guidance provides some helpful tips to spot the most common types of tax avoidance schemes.
Multiple documents
You may be asked to sign multiple documents and additional contracts. Compliant umbrella companies will only ask you to sign and return the Contract of Employment.
Additional or “enhanced” options
Some unethical payroll providers will promote “enhanced” arrangements where you will be offered inflated pay retention, perhaps in exchange for a higher margin/fee.
Higher take-home pay
Any company offering you the chance to pay less tax and retain more money is almost certainly a tax avoidance scheme. All compliant umbrella companies process payroll in the same way – Pay As You Earn (PAYE). Therefore, your pay retention will be very similar with all compliant umbrella companies (with the margin being the only thing that’ll change your net salary between compliant umbrellas).
Unusual payment methods
Compliant umbrella companies will pay you with HMRC’s tax system PAYE. Tax avoidance schemes and non-compliant umbrella companies will usually process payroll using unusual methods. These could include paying you with loans, shares, job board credits, bonuses, annuities and capital payments – just to name a few. If a payment method sounds shady or unusual – it’s probably a tax avoidance scheme and should be avoided.
Higher pay compared to payslips
A small selection of tax avoidance schemes may pay you differently than what your issued payslips states – to hide the fact they’re acting unethically. Therefore, if you receive more pay than what you were quoted (or is documented) – this could be a sign of tax avoidance.
Comparison and broker websites
There are a lot of websites out there designed to help you choose a compliant umbrella company for your payroll. However, be warned – some of these sites are actually run by tax avoidance schemes trying to trick you into thinking you’re being shown compliant umbrellas with your best interests at heart. Be sure you can trust the website you’re using before speaking with any payroll providers you’re directed to.
More than just a margin
Compliant umbrella companies will only generate one source of income from employees – the margin that’s deducted from gross salaries. The margin will be pre-determined and shouldn’t come as a surprise to you. If you encounter a payroll provider making additional income from you, possibly with creative sounding add ons and fees – this could be a sign of tax avoidance schemes.
Based outside the UK
Your payroll provider should be based in the UK as a UK taxpayer. Many tax avoidance schemes (but not all) are located in known tax havens such as the Isle of Mann and the Channel Islands. Make sure any payroll provider you’re interested in using is based in the UK.
Why do tax avoidance arrangements not work?
Firstly, by engaging with a tax avoidance scheme, you will not be paying the correct amount of tax and National Insurance Contributions. As a result, you will likely face penalties from HMRC in the future (including repaying outstanding tax, interest and potentially an additional fine).
Any income you receive in exchange for working on a temporary assignment should be subjected to PAYE. Any additional payments or disguised methods of inflating your retention should be taxed too, but almost certainly won’t be. The government reiterated this point in their latest guidance:
“Any amounts paid to you as part of your reward for the work you carry out are counted as employment income and should be subject to Income Tax and National Insurance contributions under PAYE. This is regardless of whether the payments are for earnings or wages or described or claimed to be something else such as a loan. It does not matter whether they are paid to you directly from an umbrella company or through a third party. You should not trust any umbrella company which tells you otherwise.”
Repaying loans (disguised remuneration)
Some tax avoidance schemes, as referenced above, will process loans as part of your payment and will say these don’t need to be paid back (thus avoiding tax). However, the government is aware of some third parties trying to claim back these loans from contractors who were not expecting to be contacted. The government state:
“You may have been contacted by a third party about repaying a loan that you took out from a disguised remuneration scheme. In most cases, the request for repayment is because the original provider of the loan has sold the outstanding loans to a third party. In some cases, a loan may also be recalled by an insolvency practitioner.
Some of these third parties are now contacting users of the scheme to demand repayment of their outstanding loans — even if users believed they would not be asked to repay the loans. We are very concerned to hear about these requests for repayment of loans and understand this may be distressing for those affected.
The government is unable to intervene in a dispute between two private parties over loan contracts.”
For further guidance on this, please visit the government’s policy paper: Repaying a disguised remuneration loan to a third party.
How to stay clear of tax avoidance schemes
You must use compliant umbrella companies for your payroll, or the consequences could be severe. The following tips will help you pick a trustworthy umbrella and stay clear of tax avoidance schemes.
Understand the warning signs of tax avoidance schemes
This article is full of advice to help you understand the warning signs of a tax avoidance scheme. However, there is plenty of additional advice out there. Please read the following:
- Working through an umbrella company – government guidance that explains how working through a compliant umbrella company should work.
- Tax avoidance – don’t get caught out – a campaign run by the government to help you avoid unethical payroll companies.
- Umbrella companies offering to increase your take home pay (Spotlight 45) – Information about tax avoidance schemes on the government’s website.
- Tax avoidance schemes – a guide published on helpful resource umbrellacompanies.org.uk.
Choose an umbrella company with a reputable professional accreditation
To ensure you choose an umbrella company with your best interests at heart, we recommend you pick one with an FCSA accreditation. The FCSA (The Freelancer and Contractor Services Association) is the UK’s leading professional body committed to ensuring the supply chain of temporary workers complies with HMRC’s rules and regulations. With over 500 umbrella companies in the UK, you must pick one of the trustworthy ones, because the dangers associated with tax avoidance schemes can be severe.
FCSA accredited umbrellas must successfully prove they operate in accordance with the FCSA’s strict Codes of Compliance, which are publicly available on their website.
Get a Key Information Document (KID)
Before choosing your umbrella company, make sure your staffing agency issues you with a Key Information Document (KID) – an overview of your assignment rate, the deductions and your expected net salary.
Reporting a tax avoidance scheme and settling tax affairs
If you’ve encountered a tax avoidance scheme and you want to report it, you can do so via the government’s website. For more information, please visit: Report tax fraud or avoidance to HMRC.
If you believe you owe tax, HMRC will provide support if you contact them. The HMRC site states:
“If you’re facing difficulty in making a tax payment you should ask us about affordable monthly payment options. We’ll always try to work with you to negotiate time to pay based on your income and expenditure.
Time to pay arrangements are based on an individual’s specific financial circumstances, so there is no ‘standard’ time to pay arrangement. We look at what you can afford to pay and then use that to work out how much time you need to pay and over what time period.”
Speak to your HMRC contact if you want to discuss any tax you believe you owe or email CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk.
Have you seen HMRC’s regularly updated list of named tax avoidance schemes, promoters, enablers and suppliers?
In an online corporate report entitled ‘Current list of named tax avoidance schemes, promoters, enablers and suppliers’, the government has started naming tax avoidance schemes. It’s well worth reviewing before you commit to a payroll provider – to ensure they’re not featured on it. As well as naming the tax avoidance scheme, the report also explains why the payments are not compliant, as well as outlining the details you need to ensure you don’t engage with the company in question.
This report is being updated frequently, so it’s well worth visiting it every week to see if any new companies have been added to the list.
Fusion Business Services offer a range of contractor services
Fusion Business Services offers a host of services for contractors and freelancers and we would be delighted to discuss how we can support your business. Please give our expert team a call on 0800 2294020 or schedule a free consultation.
