In principle, umbrella companies provide contractors with an administratively simpler alternative to working through a personal services company arrangement. A contractor working on a contract for a third-party company will often seek to route his compensation through an umbrella, which is responsible for paying salaries from which they make deductions for taxes under PAYE and their own fees.
A recently published ‘spotlight’ by HMRC has issued a warning to employment agencies over their use of umbrella companies in promoting tax avoidance schemes, writes Tax Litigation and Resolution partner Matthew Greene, associate barrister Guy Bud and trainee solicitor Rose-Marie Sage.
Background
Largely as a result of their adoption by employment agencies, umbrella companies have become an important feature of the national economy. They are particularly common among workers in the utilities, power and healthcare sectors. It has been estimated that as many as 700,000 people in the UK work through such structures.
Although they can offer genuine administrative advantages, some umbrella companies have been implicated in marketing tax schemes to their users. HMRC identified umbrella companies in a 2021 report as the largest contributor to marketing and facilitating disguised remuneration schemes.
HMRC spotlight
As part of its strategy to tackle non-compliance, HMRC’s focus has been to put pressure on employment agencies to carry out more due diligence on umbrella companies with whom they have a business relationship and to be more transparent with contractors. This point was made forcefully in guidance issued in November 2023, which also warned about possible recourse against the employment agencies themselves in cases of non-compliance.
Spotlight 64, issued on 22 April 2024, takes a similar line and is explicitly labelled a “warning for employment agencies”. It is aimed particularly at employment and recruitment agencies, which are used, deliberately or inadvertently, as promoters for schemes marketed through specific umbrella companies. It emphasises that agencies should carefully check the details given by umbrella companies about their products and take independent advice where appropriate.
As well as the commercial risks to their business, the spotlight also warns agencies that failure to do so may result in penalties under the existing regimes tackling “enablers of defeated tax avoidance” that are equal to the total value of relevant consideration received in exchange for enabling the arrangements. It also flagged the risk of “naming and shaming” under HMRC’s recently introduced powers to combat “promoters” and “enablers”.
What should you do about Spotlight 64?
The spotlight re-emphasises that dealing with tax avoidance through umbrella companies is a major priority for HMRC. It is important for employment agencies, businesses and contractors to review their positions to ensure they are not inadvertently exposed to any possible liabilities, either under current rules or any introduced in the near future.
This remains a real possibility. A call for evidence regarding the role and issues surrounding umbrella companies ran from 2021 to 2022, following which the government consulted on policy options to regulate umbrella companies and tackle non-compliance. Further guidance is expected later this year. Far-reaching new measures are likely to follow.
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