Some Umbrella Companies May Not Be Compliant Say HMRC

May 23, 2019

Categorised in: HMRC Compliance, Umbrella Company Alternatives,

As a contractor, working under an umbrella company can be risky due to the IR35 regulation. In April 2000, a tax legislation named IR35 was introduced to combat tax avoidance with self-employed workers supplying their services through intermediaries, such as limited companies.

Such workers have also been referred to as ‘disguised employees’. Umbrella companies act as the contractors employer, and are considered as the ’middle man’ between the contractor and his or her client. Once a contractor has completed the work for an agreed contract, the umbrella company will take care of all administrative tasks, such as payroll and invoicing.

As a contractor, the promise of increased take home pay can sound a very attractive offer. However, it can come with extreme risks that lead to you paying additional tax, interest and further penalties from HMRC.

What Is Tax Compliance?

If a company is tax compliant, it means they have submitted their tax returns and correctly stated their income and deductions, paying the correct amount of tax for that year. Failing to comply with tax laws can lead to serious penalties and in extreme cases, imprisonment.

Are Umbrella Companies Tax Compliant?

Whilst most umbrella companies will operate within the tax law, others may promote methods to increase your take home pay, claiming they are legitimate, when in fact they are not. Some may claim that you can keep between 80-95% of your wages, however we know that the basic rate of tax is 20% with National Insurance contributions also due, so the figures don’t add up.

As a contractor or temporary worker,  it is crucial that you are aware of these tax avoidance schemes as the risks associated could result in additional fines and consequences.

To summarise, not all umbrella companies are fully tax compliant, despite their best efforts to advise you otherwise. A legitimate umbrella company should pay you for all of your worked hours, deducting tax and National Insurance contributions, and reimburse legitimate expenses. If your umbrella company is offering anything outside of these terms, it is critical that you are confident there are no risks involved. Anything that sounds too good to be true, most likely is!

How Do I Know If My Umbrella Company is Compliant?

If an umbrella company is offering you the opportunity to increase your take home pay, there is an increased chance the method they are using contributes towards tax avoidance. Examples of these methods can include:

  • Offering payment method that they are advising is not subject to income tax or national insurance, for example a loan or investment payment.
  • Promising that you will keep between 80-95% of your wages
  • Your payment is being routed through various companies before it reaches you

For more information on umbrella companies offering to increase your take home pay, visit the HMRC guidance page.

Hive360 Is Fully Compliant With Tax Legislations

Umbrella companies can be a risky approach to payroll management and some of their practices may be considered as tax avoidance in the eyes of HMRC. At Hive360, we work to a PEO employment model which is now well established and has proved successful for millions of US workers.

Hive360 is responsible for providing your permanent and temporary staff with their pay, pension and benefits, thus ensuring that you are compliant with current tax legislations. Get in touch today to see how we can help you.