Warning for employment agencies using umbrella companies (Spotlight 64)
Find out about non-compliant umbrella companies using employment agencies to sell their tax avoidance schemes.
HMRC is aware of some umbrella companies who use employment and recruitment agencies to promote their tax avoidance schemes.
Some umbrella companies may give commitments about the schemes to agencies that sound too good to be true — and they often are. Whilst employment and recruitment agencies might believe they are agreeing to one set of arrangements, it could be a tax avoidance scheme that the umbrella is promoting.
These schemes are targeted at individuals such as contractors and other temporary workers, who may not know the risks of using them. Employment and recruitment agencies should:
- check very carefully the details they are given by umbrella companies about their products
- consider taking independent professional advice if they are unsure if an umbrella company they plan to use is compliant
Most of these schemes do not work and are successfully challenged by HMRC in the courts and tribunals. Agencies need to avoid recommending such schemes. They must also carry out due diligence to make sure they are not using non-compliant umbrella companies.
Signs an umbrella company may be operating a tax avoidance scheme
You should be wary of umbrella companies that:
- offer financial incentives significantly higher than industry standards
- provide the workers and agency with different versions of the payslip
- make payments to workers that are higher than the amount on their payslips
- make payments to third parties, who then make payments to the workers
- are based outside the UK
This is not an exhaustive list.
Potential risks for your agency
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. Taking part in these supply chains could:
- damage the reputation of your business
- affect your ability to secure and maintain contracts
- affect your business relationships with workers and end clients
You could also face financial damage due to penalties and tax liabilities.
HMRC will pursue those who promote or enable tax avoidance. If HMRC defeats an abusive tax avoidance arrangement, they will use the enablers penalty regime against anyone who:
- designed the arrangement
- sold the arrangement
- enabled the use of the arrangement
Under new powers introduced in 2022, HMRC can publish information about enablers when they suspect they are involved in:
- promoting a tax avoidance scheme
- having a role in making a scheme available to use
The government recently consulted on options to tackle non-compliance in the umbrella company market, including:
- penalties for agencies failing to carry out mandatory due diligence
- additional circumstances in which agencies could be liable to pay tax liabilities
Responses to the consultation will be published in due course.
Steps to take to help protect your agency
There are various steps you can take to help reduce your risk of promoting non-compliant umbrella companies. These include:
- finding out how to reduce your risk of using an umbrella company who operates a tax avoidance scheme
- regularly checking HMRC’s list of named tax avoidance schemes, promoters, enablers and suppliers
- being aware of the responsibilities for employment businesses working with umbrella companies
Steps to take to help protect your workers
Share information with your workers before and during the time an umbrella company employs them.
HMRC’s Tax avoidance – Don’t get caught out campaign will help workers to:
- spot the warning signs of tax avoidance
- report tax avoidance
- leave or report a tax avoidance scheme
The guidance on working through an umbrella company helps workers to understand how they’ll be paid.
Report a non-compliant umbrella company operating a tax avoidance scheme
If you suspect an umbrella company is not complying with the tax rules, you can report it to HMRC.
If you are using an umbrella company operating a tax avoidance scheme
You can contact HMRC for help if you are already promoting tax avoidance schemes.