May saw umbrella companies hit the headlines once again following a BBC File on 4 investigation revealing that 48,000 mini umbrella schemes had been created in the past five years, costing the UK “hundreds of millions of pounds” in lost taxes.
Amendments were also proposed to the UK Finance Bill in a bid to address recently highlighted issues. Despite party-wide MP support, proposals to further regulate umbrella companies were disappointingly rejected.
What does all of this mean for contractors?
The April 2021 introduction of the Off-Payroll legislation to the private sector saw hirers become responsible for determining the IR35 status of contractors. It meant that many contractors faced being determined as “inside IR35” and taxed accordingly, resulting in reduced take-home pay.
This provided an opportunity for rogue and unethical payroll companies to swoop in with the promise of higher take-home pay. Such schemes will typically pay a small portion of a contractor’s earnings via PAYE but disguise the remaining larger part of the income as something else - often a loan - in order to avoid tax obligations.
While contractors looking to maximise their earnings may be tempted by these schemes, they are likely to leave contractors facing significant liabilities. Sign up, and you’ll be putting yourself at significant personal financial risk.
How to spot a “have-I-got-a-good-idea-for-you” scheme
As a contractor, the chances are that your first introduction to an umbrella company will be through the recruitment agency. The agency will provide you with a Key Information Document, which breaks down how you will be paid and features a list of umbrella companies on a preferred/approved suppliers list.
We would always recommend opting for an accredited umbrella, given they are subject to ongoing checks to ensure compliance. However, it’s crucial you remain vigilant and conduct your own checks, even if the provider claims to be accredited.
Here are some of the red flags to look out for:
Promises. If an umbrella company promises more take-home pay than you’ve calculated or expected, alarm bells should be ringing.
Discrepancies. You’re likely to receive both a payslip and a text message detailing what you’ll be paid. Suspicions should arise if those two figures don’t match.
Things change. Be wary if everything is fine, matches up, and you’re paying the right amount of tax at the start of a scheme, but the figures suddenly change, or you receive a message to say the amount you’re getting paid is changing.
Go a step further
Unfortunately, some schemes will present contractors with a payslip that seems correct but is actually a false document. That’s why we recommend that all contractors head onto the .Gov website and either set up or sign in to your personal tax account to view all reported earnings.
Here, you’ll be able to check whether the reported earnings match up with the money you’ve received and the information on your payslips.
What next?
If you spot a problem, it’s crucial you flag it as quickly as possible to avoid any personal financial risk. There are two main ways to report a non-compliant umbrella company - through Professional Passport or by reporting directly to HMRC. If you act fast, HMRC may offer you assistance to resolve it. However, if you ignore it and your umbrella company is found to be avoiding tax, HMRC will come after you for any unpaid liabilities.
“It won’t happen to me!”
Historically, a number of schemes flew under HMRC’s radar, but we now live in an age of real-time information. There’s also recruitment company legislation in place whereby they have to report how much has been paid to workers. All of this means that HMRC has everything they need to quickly and easily spot discrepancies.
The loan charge scandal should act as a reminder that time is not a safety net for contractors. Not only do investigations take place years later, but the government can (and do) release retrospective legislation that could mean something you were once assured was a “legal” way to earn more money becomes suddenly illegal, and you have to pay back any missing liabilities.
For contractors working with umbrella companies, we advise retaining full visibility and control of what you are being paid. And always remember, if something sounds too good to be true, it probably is.
Listen to CEO and founder of Professional Passport Crawford Temple discuss disguised remuneration with ContractorCalculator’s Dave Chaplin on video podcast “The Compliance Files: Have I got a good idea for you!”
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