HMRC Issue Further Warning Regarding Umbrella Companies
On 25 August 2022, HMRC published Spotlight 60, a memo directed at agency workers and contractors who provide their services via an umbrella company which employs them.
The Spotlight follows previous similar publications (Spotlight 45 and Spotlight 55) about use of umbrella companies.
There is no statutory definition of an umbrella company but it is essentially a company that employs temporary workers who work for different end clients. Umbrella companies do not source work, but may enter into a contract with an agency who will. An employee of an umbrella company is subject to the deduction of tax and employee National Insurance contributions in the usual way.
HMRC is concerned that some umbrella companies are misleading agency workers and contractors resulting in agency workers and contractors unwittingly participating in disguised remuneration schemes and consequently, not accounting to HMRC for the correct tax and National Insurance contributions in respect of their pay.
HMRC has given some guidance to individuals to assist them in spotting when an umbrella company may be using a tax avoidance arrangement without their knowledge. These include:
- discrepancies or oddities regarding their employment contract with the umbrella company such as a brief employment contract, no employment contract, an additional contract, or a digital contract, or any arrangement where it makes it difficult for them to understand what terms apply to their employment
- being offered higher take-home pay, payments that purport to be non-taxable, a tax-efficient 'enhanced' arrangement, unusual payment arrangements or greater pay than that shown on payslips
- umbrella companies retaining a higher fee or margin than others, being based outside the UK, or being referred by comparison or broker websites
Umbrella companies can offer a useful service to employment businesses and contractors. However, the use of non-compliant umbrella companies may leave workers and contractors at risk of being involved in a tax avoidance scheme, ultimately resulting in them paying additional tax, interest and possible penalties.
We recommend that agents, contractors and umbrella companies familiarise themselves with HMRC's update.
