Terms that scream “dodgy umbrella company”

In the last month, HMRC has put out new guidance to warn agencies about the consequences of dealing with shady umbrella companies, and critically, how to spot them.

By shady, we mean umbrella companies who use tax avoidance schemes or business models to pay their workers. These are known as “disguised remuneration schemes” because they do just that – they disguise taxable earnings as something that isn’t taxable.

Typically , the company will operate PAYE on part of the amount paid to the worker, then refer to the remaining amount as something else and treat it as non-taxable income.

Alarm bells ringing?

As per HMRC, there are certain terms that non-compliant umbrella companies may use in reference to untaxed payments to workers. If you come across them as an agency or contractor, they should set alarm bells ringing, and warrant further investigation before you get involved.

  • Loans
  • Salary advances
  • Grants
  • Capital payments
  • Credit facilities
  • Annuities
  • Profit shares
  • Shares and bonuses
  • Amounts held in a fiduciary capacity

As a rule, these schemes are marketed by non-compliant companies as a way of inflating take-home pay.

While we’re on that subject, it is also important to be aware of so-called Mini Umbrella Company fraud – another highly non-compliant payment arrangement blighting temporary supply chains. Find out more here.

Why should agencies care?

This is a reasonable question, after all it is the worker themselves who enters into the employment contract with the umbrella company and it’s fair to wonder what level of risk a recruitment agency actually runs. Turns out…quite a lot.

Penalties for enabling tax avoidance

If you make payments to an umbrella company running an abusive tax avoidance, HMRC may determine that you have enabled that arrangement. The penalty for this is 100% of the fees receivable and HMRC will also be able to publicly identify your business as an enabler of tax avoidance.

Liability for unpaid PAYE tax and NICs

Under the Offshore Employment Intermediaries legislation, you are responsible for operating PAYE on payments made to an offshore umbrella company worker.

Offshore umbrellas can go to some effort to disguise that they are offshore by using a UK-based intermediary to contract with agencies. But even if you are not aware that there is an offshore umbrella in the supply chain, you are liable for any unpaid PAYE tax and National Insurance contributions.

Reputational and commercial risk

Bluntly speaking, your business and reputation are on the line if you get caught up in non-compliant supply chains. Ultimately these can put your contracts and commercial relationships at risk and burn your bridges with candidates, hirers and partners.

Coming soon…

So, we have identified how to spot a dodgy umbrella company and the potential risks of paying contractors through one.

As the contingent workforce continues to increase in the post-pandemic economy, these non-compliant schemes are only going to multiply (hence HMRC’s timely guidance on the subject).

The answer is Due Diligence. That’s all about asking the right questions of your umbrella company PSL. Third party auditors are costly but where do you start to do it yourself?

Our Due Diligence Guide for recruitment agencies is coming soon, so watch this space!

Related articles

Mini Umbrella Company fraud – don’t get dragged through the MUC

Clear-cut umbrella guidance from HMRC

The good umbrella company checklist