Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme
If you’re a UK agency or business placing or using temporary labour, find out what you can do to reduce your risk of using a non-compliant umbrella company.
If you’re an agency (also known as employment business) or a business using temporary labour (referred to as a hirer in this guidance), you need to be aware of the potential dangers of umbrella companies that operate tax avoidance schemes. Using one can lead to reputational and financial damage.
Some umbrella companies are non-compliant and operate disguised remuneration schemes. These schemes claim to prevent certain payments made to workers from being taxable. They aim to do this by describing taxable earnings paid to a worker for doing their job as something that is non-taxable instead.
How you may become involved with tax avoidance
Some disguised remuneration schemes involve a worker becoming employed by a non-compliant umbrella company operating an avoidance scheme.
The umbrella company will operate Pay As You Earn (PAYE) on part of the amounts paid to the worker, while the remaining amounts paid are treated as non-taxable and so not subject to PAYE.
These untaxed payments may be referred to as:
- loans
- grants
- salary advances
- capital payments
- credit facilities
- annuities
- profit shares
- shares and bonuses
- amounts held in a fiduciary capacity
In all cases, these schemes involve untaxed payments being made to workers by a non-compliant umbrella company to increase their take-home pay.
If you engage with an umbrella company operating an avoidance scheme, you become part of the supply chain of the scheme.
You must also be vigilant of mini umbrella companies involved in fraud. Find out about the warning signs of mini umbrella company fraud.
Potential consequences for your business
Most of these schemes do not work and are successfully challenged by HMRC in the Courts and Tribunals, meaning they do not comply with the law.
If you use a worker employed by an umbrella company involved in an avoidance scheme, you put yourself and your workers at risk of:
- tax compliance checks
- penalties
- tax liabilities
You also risk reputational damage and loss of business.
Penalties for enablers of tax avoidance
If the umbrella company operates a tax avoidance scheme, you may incur a penalty for enablers of tax avoidance. This penalty applies to those who design, market, sell, manage or otherwise enable the use of abusive tax avoidance arrangements which are later defeated by HMRC.
If you enter into a contract with and make payments to an umbrella company operating an abusive tax avoidance scheme, you may have enabled the use of that arrangement.
The penalty is 100% of the fees receivable in consideration for any actions taken by you which enabled the arrangements. If you receive an enabler penalty, HMRC may also be able to publish your details, which will publicly identify you as an enabler of defeated tax avoidance.
Find out more about who HMRC classifies as an enabler of tax avoidance, what the penalties are, and what to do if you may be liable.
Liability for Income Tax and National Insurance contributions
You are responsible for operating PAYE on payments made to an offshore umbrella company worker, due to the offshore employment intermediaries rules, if you are a UK based:
- agency placing a worker with a hirer
- hirer and there is no UK based agency in the supply chain
This means you may be liable to pay any unpaid Income Tax and National Insurance contributions resulting from the use of a tax avoidance scheme involving an offshore umbrella company.
You should be mindful that some offshore umbrella companies take steps to disguise the fact that they are operating offshore by using a UK based company to contract with agencies.
You are responsible for any unpaid Income Tax and National Insurance contributions even if you are not aware that there is an offshore umbrella company in the supply chain.
Reputational damage
People and businesses you work with value low risk and compliant behaviour.
Your reputation is at risk if you take part in non-compliant supply chains. These include supply chains involving umbrella companies operating tax avoidance schemes. Engaging in these practices can:
- compromise your commercial relationships
- affect your ability to maintain contracts
- affect business relationships with workers and other customers
Steps you can take to protect your business
These steps can help you reduce your risk of using non-compliant umbrella companies:
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Find out what you need to do when you engage a worker.
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Consider adding clauses in your contracts with umbrella companies.
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Check payslips to make sure PAYE is being operated on the full amount received by the worker.
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Be extremely cautious about working with umbrella companies that are offshore or offer financial incentives.
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Check HMRC list of named tax avoidance schemes, promoters, enablers and suppliers
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Check the umbrella companies details and returns filed with Companies House to make sure details such as its financial position, location and trading history are consistent with what you have been told.
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Educate your workers by sharing information with them about tax avoidance schemes.
How to engage a worker
If you use a worker employed by an umbrella company, to protect your business from becoming involved with tax avoidance, it’s your responsibility to understand:
- how the workers are engaged
- who is responsible for paying them
- how they get paid
If you are an agency, you must also supply your worker with a key information document before agreeing contractual terms.
Clauses you can consider adding in your contracts
If you are an agency you can add a clause in your contract with umbrella companies requiring:
- them to provide you with payslips for a specific named worker (chosen by you) upon request
- them to show evidence of PAYE returns filed and payments made to HMRC
- their directors to indemnify you against tax liabilities if they do not operate PAYE on the full amount received by the worker
- your authorisation before further sub-contracting to a third party
If you’re a hirer, you should consider if any of these clauses could be included in your contracts with agencies.
How to check payslips
You can do sample checks of payslips by:
- requesting payslips from both the umbrella company and the worker
- comparing them both to make sure they match
- checking that PAYE has been operated on the full amount received by the worker
Check HMRC list of namesd tax avoidance schemes, promoters, enablers and suppliers
HMRC can publish information about tax avoidance schemes we are aware of, and about those involved in the supply and marketing of these schemes. This includes non-compliant umbrella companies operating tax avoidance schemes.
You should check the HMRC list of named tax avoidance schemes, promoters, enablers and suppliers for any umbrella companies you currently work with or might work with in the future. If they appear on this list, you should stop all activity with the umbrella company and warn your workers employed by them. This list is updated regularly.
If a tax avoidance scheme is not shown on the list, this does not mean that the scheme works or is in any way approved by HMRC. HMRC does not approve tax avoidance schemes for use.
Educating your workers
You can share information with your workers both before and during the time an umbrella company employs them. The following articles will educate them about:
- tax avoidance — do not get caught out
- working through an umbrella company
- umbrella companies offering to increase your take home pay
- comparison and broker websites marketing umbrella companies are not always what they seem
Where the checks result in the handling of personal data you must follow the UK General Data Protection Regulations (GDPR).
How to report potential tax avoidance
If you’re approached by, or suspect, an umbrella company is not complying with the tax rules, you can report it to HMRC.
Last updated 8 November 2023 + show all updates
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Section 'Check HMRC list of namesd tax avoidance schemes, promoters, enablers and suppliers' has been added.
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First published.