Temporary workers and non-compliant umbrella companies

HM Revenue and Customs (HMRC) is urging social housing contractors to watch out for unscrupulous promoters of tax avoidance schemes.

These often involve an umbrella company giving a worker some or all of their pay in the form of a loan, salary advance, grant, annuity or any other payment they’re told they’re not expected to pay back. These payments are claimed to be non-taxable, often without explanation, with the promise of higher take home pay.

Most of these schemes do not work and are successfully challenged by HMRC in the courts and tribunals.

Those who join avoidance schemes then end up having to pay the tax due in the first place – as well as interest and potential penalties - on top of the fees they have already paid for joining.

If you use a worker employed by an umbrella company involved in an avoidance scheme, you put yourself at risk of:

  • Tax compliance checks.
  • Penalties.
  • Tax liabilities.
  • Reputational damage and loss of business.

You should ensure you carry out robust supply chain due diligence to help protect your business from using non-compliant umbrella companies and becoming involved in the supply chain of a tax avoidance scheme.

HMRC wants to stop people being drawn into such schemes as well as help them leave if they believe they might be caught up in one.

One of the best ways to do this is to educate your temporary workers about the risks of tax avoidance schemes operated by non-compliant umbrella companies and the warning signs to watch out for, including:

  • Any scheme that allows them to keep more of their income than they would expect, with little or no deductions for Income Tax and National Insurance contributions (NICs).
  • Some, or all, of their payments being ‘non-taxable’. These could be described as loans, annuities, bonuses, or shares but are no different to normal income and you still need to pay Income Tax and NICs on them.
  • Schemes they are told are safe and compliant or approved by HMRC. This is not true - HMRC never approves avoidance schemes.
  • When only a part of the total payments they receive may be taxed as income. If they are employed, this is usually a National Minimum Wage amount.
  • Being offered a choice between a standard or ‘enhanced’ pay scheme. The enhanced version is likely to be tax avoidance.
  • Being asked to sign more than one contract or agreement.
  • An employment contract or agreement that does not state how their income will be paid, or provide a breakdown of all deductions.
  • Being offered a ‘cash bonus’ if they recommend the scheme to a friend.

You can also ask your temporary workers to check out HMRC’s list of named tax avoidance scheme promoters. If you or your workers are approached by a named umbrella company - steer well clear. The list is not exhaustive so if an umbrella company is not shown, this does not mean they are not operating a tax avoidance scheme or the scheme is in any way approved by HMRC.

You could also share HMRC’s Tax Avoidance – Don’t Get Caught Out campaign with your temporary workers to help them spot the signs of an avoidance scheme, report it, or get help leaving one. An interactive risk checker allows workers to check whether their current contract could involve tax avoidance.

If you become aware of a tax avoidance scheme or an agency or umbrella company that is not following the tax rules, you should take action to report this to HMRC.

Helping workers to steer clear of tax avoidance will help reduce reputational risks for your business and remember, if it sounds too good to be true it almost certainly is.

RSM is a leading provider of audit, tax and consulting services, with around 3,800 partners and staff in the UK. We're working with our tax advisors RSM to help shape government policy on taxation as it affects the sector and to keep housing associations informed of key issues.