HMRC warn that comparison websites or brokers marketing umbrella companies are not always what they seem and urges contractors to do their due diligence.

With only a delay announced to the IR35 reform, it seems that there has (as predicted) been a hike in umbrella companies.  On 27th April , HMRC issued a new Spotlight urging contractors to take independent advice before working with an umbrella company to avoid finding themselves liable for unpaid tax and national insurance.

This new guidance warns that promoters of tax avoidance schemes are using brokers and price comparison websites to attract clients to umbrella companies not abiding by the tax rules. As has been the case for many years, these businesses try to convince contractors with offers of higher take home pay. Sites often mixing compliant and non-compliant providers, the latter sometimes being called ‘advanced’ or ‘enhanced’ umbrella services, which can make them sound like a legitimate PAYE umbrella.

HMRC’s Spotlight 55 publication provides guidance to workers on how to choose an umbrella including some of the warning signs to look out for. Taxpayers are told to be especially careful of arrangements offering higher take home pay involving:

  • annuities;
  • fiduciary receipts;
  • credit facility;
  • shares;
  • capital payments or advances; or
  • bonuses
  • loans

It would seem like common sense but HMRC are advising taxpayers to check whether the umbrella even has a company name, registration number and postal address. I say common sense, as you have to remember you trust these companies to handle your money – you wouldn’t just transfer your savings to any old bank, now would you?

A compliant umbrella company is used to employ a contractor, as an employee for tax purposes, while he or she performs work for an end client. The main function of a brolly is to facilitate payment to their employee, net of PAYE and National Insurance contributions (NIC). In essence, we act as tax collectors for HMRC, so if they don’t get what they expect it can lead to many shall we say issues and if these relate to personal taxes, it is HMRC that will come after you!

The challenge is that while most umbrellas comply with the tax rules for their workers, not all are quite so clean cut and with offers of greater take home pay some contractors can fall into that trap especially in such tough financial times.

Taxpayers are advised to be aware that if their salary is paid through different routes, they may not have paid income tax and NIC on all elements and independent professional advice should be sought. HMRC reminds those tempted that they remain legally responsible for their own tax affairs and for paying the correct amount of tax and NIC.

HMRC also warns taxpayers to be wary of claims, such as: “We only use HMRC compliant umbrella companies that are independently reviewed” and “QC approved”. For not the first time, HMRC highlight that they don’t approve umbrella companies and that it will always challenge tax avoidance arrangements.

Maybe now is the time for HMRC to go back to the announcement from the Taylor Review where they looked to regulate the industry. This was somewhat lacking in the last Finance Act, but maybe the delay to IR35 will give them time to try and provide a little more clarity in the industry and level out that playing field, cut out the self regulation and rid the market of those companies that continue to put contractors at risk of investigation by HMRC.

For further information see HMRC guidance Tax avoidance schemes aimed at contractors and agency workers.

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