HMRC issues guidance to reduce risk of using umbrella companies engaging in tax avoidance

12 October 2021

As off payroll rules bring more workers under the remit of PAYE, some companies are finding unconventional, and potentially non-compliant, ways to avoid this and pay less tax. HMRC has issued some guidance to educate agencies and hirers on identifying and avoiding umbrella company schemes that engage in tax avoidance.

These tax avoidance schemes operate on disguised renumeration, reporting some earnings as non-taxable and therefore not subject to PAYE. Some of the untaxed payment types, used to increase take-home pay, include:

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

HMRC warns “if you engage with an umbrella company operating an avoidance scheme, you become part of the supply chain of the scheme” and that “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 engaging in tax avoidance you risk tax compliance checks, penalties, and tax liabilities. Penalties are 100% of the fees receivable and if you are identified as being an enabler, HMRC may also publish your details.

The steps HMRC recommends to reduce your risk of using non-compliant umbrella companies are to:

•    Perform due diligence on your whole supply chain
•    Find out what you need to do when you engage a worker
•    Consider adding clauses in your contracts with umbrella companies
•    Check payslips to make sure PAYE is being operated on the full amount received by the worker
•    Be extremely cautious about working with umbrella companies that are offshore or offer financial incentives
•    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
•    Educate your workers by sharing information with them about tax avoidance schemes

If you suspect an umbrella company is not complying with the rules you can report it to HMRC.

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