Tax Avoidance by Umbrella Companies

Umbrella companies can and do, get caught up in tax avoidance schemes, plots or plans which can have grave consequences for employees, and the organisation. Umbrella companies, by definition, are merely a form of employee management as there is no national standard or definition of umbrella company under Her Majesty’s Revenue and Customs (HMRC) governance. These types of companies are not, however, favoured by the HMRC and are often subject to a tax investigation, as they are known to gravitate towards tax evasion mechanisms.

Contractors and temporary employees are often the most common to use and be associated with, umbrella companies and are the best examples of those subject to their risk (if the company is not compliant). Umbrella companies are like, and take a similar structure to, an agency and manage various contractors or employees.

To better understand the risks of these schemes, let’s break down what exactly they look like:

  • Companies tend to offer employees a higher wage and even lower paperwork, a seemingly appealing offer to prospective employees
  • Companies and those within them may tell you that your pay is not subject to tax as, for tax purposes, it is viewed as a loan or something along those lines.
  • Companies often ask you to formally sign up, which means associating your name with these schemes, opening yourself up to personal liability and acknowledgement in these illegal schemes.

If you have signed up for this, here is what your payment may look like:

  • Company provides a first, smaller payment with taxes deducted
  • You then receive a significantly larger payment without any taxes or deductions. This payment may come from a different account than the first, often even from an offshore or overseas account.
  • On your tax documents and payslips, you may notice that the more substantial sums are listed as something other than employment income (i.e. a loan, etc.).

If you think you may be working with, working for and or partaking in a non-compliant or tax evading umbrella company, here are some red flags and ways to check:

  • Have you been promised over 80% of your salary or wages? If so, this is a red flag, even if the organisation has said this method is tax compliant, as they are likely not telling the truth, given that National Insurance deductions and contributions alone are about 20%
  • Is only part of your wage or salary paid formally through payroll (and therefore subject to taxes)? If so, this is another red flag that this umbrella company is using less than legal ways to pay you and avoid taxes by using secret, offshore or hidden accounts.
  • Is your pay listed or treated as a loan, investment or even credit? This is not standard and is a red flag, as it alludes to your payment being hidden on company financial documents or disguised as something it is not for tax purposes and for Employee Benefit Trust (EBT) tax avoidance.
  • Is your pay routed through, or received from, a company that is unfamiliar or not the company you work for? If you are receiving money that is your salary but has another company’s name or logo on it, this is a red flag that you may be inadvertently partaking in a tax avoidance scheme.

Understanding the risks of these schemes is essential as your name, assets, credit and personal money could be on the line should the organisation be targeted or subject to a tax investigation by the HMRC. Make sure to trust your instincts if you feel something is off about your pay, your company or both. You can report these non-compliant umbrella companies to the HMRC, by calling them directly or by emailing them as well.

If you have been caught up in tax avoidance and haven’t made a disclosure to HMRC or registered interest for 2019 Loan Charge  give our experienced advisers a call or fill in the form below for free and no obligation advice.

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