Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme

HMRC has updated its guidance for companies using temporary labour to reduce the risk of using an umbrella company that utilises tax avoidance schemes.

If you operate an agency or business that uses temporary labour, you need to be aware of the potential dangers. Using one of these companies can lead to damage to your finances, reputation, and even legal troubles.

Some umbrella companies operate disguised remuneration schemes which claim to prevent certain payments made to workers from being taxable. They describe taxable earnings paid to a worker for doing their job as something that is non-taxable.

How you might become involved with tax avoidance

For example, an umbrella company may operate Pay As You Earn (‘PAYE’) on part of the amounts paid to the worker, while the remaining amounts paid are treated as non-taxable and so not subject to PAYE.

Whatever the method, these schemes involve untaxed payments being made to workers by a non-compliant umbrella company to increase their take-home pay.

If you engage with an umbrella company operating an avoidance scheme, you become part of the scheme’s supply chain.

Penalties and consequences of tax avoidance

If you use a worker employed by an umbrella company involved in an avoidance scheme, you put yourself and your workers at risk of tax compliance checks, penalties, and tax liabilities. Naturally, you are also risking damage to your professional reputation and loss of business.

Among the penalties you could be given is 100% of the fees receivable in consideration for any actions taken by you which enabled the arrangements. If you receive an enabler penalty, HMRC may also be able to publish your details, which will publicly identify you as an enabler of tax avoidance.

Your reputation is at stake if you become involved in these schemes. You could compromise your commercial relationships, affect your ability to maintain contacts and affect business relationships with fellow agencies and customers.

What can you do to protect your business?

To minimise your risk of becoming embroiled in a tax avoidance scheme, you should:

  • Perform due diligence on your supply chain
  • Find out the compliance rules for engaging a worker
  • Perhaps add clauses in your contracts with umbrella companies
  • Check payslips to ensure PAYE is being applied correctly
  • Be cautious of umbrella companies that are offshore or offer financial incentives
  • Check the details of umbrella companies on Companies House to ensure what you have been told is consistent with the details on the public record
  • Ensure your workers are educated on tax avoidance schemes

As always, if you would like any further information regarding the above, please feel free to contact our offices by email