Contractors warned to choose umbrella companies with care

4 May: HMRC is urging contractors to take independent advice before working with an umbrella company to avoid finding themselves liable for unpaid tax and national insurance.

In new guidance, HMRC 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.

Contractors can be won over by offers of higher take home pay, with claims such as: “Retain 80% of your earnings after tax – safe and compliant”. Sites can offer a mix of compliant and non-compliant providers, the latter may be called ‘advanced’ or ‘enhanced’ umbrella services, which can make them hard to spot.

HMRC’s Spotlight 55 publication provides guidance to workers on how to choose an umbrella and pointers on what to avoid, 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.

Taxpayers are also advised to check whether the umbrella even has a company name, registration number and postal address.

An umbrella company is used to employ a contractor while he or she performs work for an end client. Its main function is usually to facilitate payment to the contractor, net of PAYE and National Insurance contributions (NIC).

The challenge is that while most umbrellas comply with the tax rules for their workers, not all are quite what they seem. It can be quite seductive to be told that one option leads to greater take home pay than another.

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”, highlighting that it does not approve umbrella companies and that it will always challenge tax avoidance arrangements.

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