Although continuously under HMRC’s radar, tax avoidance schemes utilised by umbrella companies have come under renewed scrutiny, with proposals for supposed rigid legislation for said sector announced by the government in a consultation paper in June 2023.
This announcement follows an evidence call on the umbrella company market commissioned by Her Majesty’s Treasury in November 2021.
Defined by the HMRC as ‘a business often used by recruitment agencies to pay temporary workers’, these companies are middlemen between temporary tax workers and home companies. Temporary tax workers, colloquially known as temps or agency workers, are those whose employment is usually for a defined, short-term period.
Despite the individual tax liability on workers, they rely on umbrella companies for the correct deduction of tax and national insurance contributions. They are, therefore, at the mercy of potential legal wrongs or inefficiencies committed by umbrella companies.
Simply put, the high risk of tax avoidance schemes used by some umbrella companies is the leading cause of this scrutiny. Whilst most are tax-compliant, others are known to conduct what HMRC describes as ‘contrived arrangements’, eventually rendering temporary tax workers susceptible to inevitably substantial tax bills from HMRC.
HMRC monitors these arrangements through the sequential ‘Spotlight’ series. The series gives information on arrangements the HMRC believes are tax avoidance schemes, and they are allocated according to the structures within respective employment sectors.
The arrangement in question is umbrella companies offering workers an increased take-home pay through a purported reduction of their tax liabilities, claiming that employees could retain upwards of (at least) 80% of their salaries; however, when taking an objective albeit factual view, there are deductibles which apply to wages, such as Income Tax at the basic rate of 20%, and up to 15.05% in National Insurance Contributions for many.
Key features of this arrangement are:
Further, there are allegations of the refusal or the stopping of payments altogether, as seen in the case of Optimum Pay Group, leading to its recent veto by Professional Passport, the UK’s primary compliance assessor for umbrella companies.
Due to the scheme’s rampancy and adverse effects on workers, the HMRC responded by issuing Spotlight 45, ‘Umbrella companies offering to increase your take-home pay’. HMRC also clarified the warning signs employees could be at risk of involvement, including umbrella companies offering short-term employment contracts with concise terms and no addendums and digital employment contracts with separate supplements.
In its consultation paper, the government puts forth three primary proposals; introduction of mandatory tax due diligence for both companies and workers, empowering HMRC to collect umbrella companies’ tax debt through a third-party enforcer and allocating the status of ‘employer for tax purposes’ to umbrella companies. According to the government, these measures seek to change ‘the incentives and the behaviours in the temporary labour market’, thereby tackling non-compliance.
For workers, it would mean mitigating the risk of embroilment with tax-inefficient schemes and, subsequently, the requirement to settle unexpected tax bills. Also, there is every likelihood that those whom these schemes have impacted stand a chance of remediation or recompense for their previous losses.
However, there are some criticisms of the government’s delayed proposals. Julie Kermode, the Chief Executive of PayePass, said there ‘are plenty of recommendations being put forward, but minimal action’ and that the recommendations need some fundamental and comprehensive amendments to render them effective, with her criticisms echoed by a former HMRC employee who suggested that the proposals were simply a summarisation of the issues, and the document therefore, a ‘waste of print’.
Further, given that the government was relatively slow to respond to the evidence call, workers during that period have been continually victimised, with the perpetrators continuing to profit from the avoidance schemes.
Nevertheless, it is evident that the sector needs urgent reform, and whether the government, in taking heed of the spate of objections concerning its recent proposals and before enacting essential legislation, does so.