Spotlight 45 – are umbrella companies too good to be true?

• HMRC identifies new tax avoidance scenario for attack on umbrellas

• Workers left responsible for identification of tax avoidance schemes

• Is the arrangement from an agency or umbrella “too good to be true”?

HM Revenue and Customs (“HMRC”) has released Spotlight 45 - Umbrella companies offering to increase your take home pay which sets out a cryptic warning that some umbrella companies and agencies offering workers arrangements which claim to save them tax but are in fact tax avoidance schemes.  Unfortunately, without any specific company or scheme being named it seems unlikely that individuals will recognise that this may apply to them.  

The Spotlight warns that, by entering into such arrangements, taxpayers run the risk of being liable for arrears and penalties of tax and National Insurance Contributions (NICs) due on their full remuneration.

HMRC’s view on such arrangements is that the umbrella company / agency will tell the individual that the payment is non-taxable because it doesn’t count as income as it’s labelled as a loan, credit or something similar. HMRC also provide an example (with the express warning that it may vary) of how the arrangement operates;

1. The individual receives a small payment which has tax and NICs deducted
2. At the same time, or shortly after, a larger payment is made to the individual without tax and NICs deducted
3. The larger payment may arrive from a different account than the first payment, potentially, although not necessarily, from overseas,
4. The payslips may show the larger payment separately and refer to it as something other than pay

The Spotlight advises individuals to check if;

• The company promises that they can keep 80, 90 or 95% of their wages and be tax compliant
• Only a fraction of the salary is paid through payroll and subject to Pay As You Earn (“PAYE”)
• The individual is paid using a loan, credit or investment payment and the company claims this isn’t subject to income tax or NICs
• The payment from your umbrella company is routed through various companies before it reaches the individual

HMRC advises that anyone involved in this type of arrangement should withdraw from it and settle their tax affairs with HMRC.

Aspire Comment

A spotlight is issued to publicise when HMRC recognises an arrangement to be tax avoidance to discourage individuals from participating in such arrangements.  Unfortunately, the lack of specific detail in this spotlight means that it is unlikely that individuals will recognise that these circumstances apply to them. 

Although HMRC make the statement that most umbrella companies and agencies operate compliantly, it is clear that HMRC still have an issue with the intermediary sector and want to ensure that all remuneration is subject to tax as earnings as defined in section 62 of the Income Tax (Earnings and Pensions) Act 2003.

The Spotlight demonstrates a worrying misconception of umbrella companies, agencies and the intermediary sector, further emphasising a long-held belief that HMRC is willing to tarnish the industry as a whole rather than seeking out and dealing with the perpetrators of these avoidance schemes on an individual basis.