On 25 August 2022, HMRC published a stern warning to agency workers and contractors employed by umbrella companies about the tax avoidance arrangements used by some umbrella companies.
HMRC is concerned that some umbrella companies use disguised remuneration schemes to claim that certain payments (for example, a loan, salary advance or annuity) made to agency workers and contractors (either directly or indirectly through a chain of companies, trusts or partnerships) are not taxable. The spotlight lists warning signs that may indicate the use of a tax avoidance arrangement, including:
- Being asked to enter into a brief employment contract, there being no employment contract, or there being an additional contract. In particular, HMRC states that workers and contractors should be extremely cautious of digital employment contracts where the detailed terms and conditions are in a separate document, making it difficult to know the true nature of the arrangements.
- Being offered higher take-home pay, payments that purport to be non-taxable, a tax-efficient "enhanced" arrangement, unusual payment arrangements or greater pay than that shown on payslips.
- Umbrella companies retaining a higher fee or margin than others, being based outside the UK, or being referred by (often related) comparison or broker websites.
The use of non-compliant umbrella companies may leave workers and contractors at risk of being involved in a tax avoidance scheme, ultimately resulting in them paying additional tax, interest and possible penalties.
HMRC has also warned that some users are being asked to repay loans that were made as part of disguised remuneration schemes even though they were told these did not need to be repaid. This may happen if the original lender has sold the loan to a third party or become insolvent.
Whilst this warning is intended to address the agency workers and contractors that sign up to umbrella company schemes, the reality of course is that most individual workers will not even get to hear of the warning, let alone read it. HMRC are, though, sending a message to both the umbrella companies and those businesses that engage them - that perhaps their focus is increasingly upon this complex and often controversial sector.
HMRC have stated that "the vast majority of these types of arrangements do not work" - a bold statement perhaps, though also implicit is their acceptance (which is definitely the case) that a number of the schemes do work and are legitimate. Businesses that use these schemes are well advised to check that they fall on the right side of that line, and that their umbrellas are not about to see the rain fall through them...
