There is no hiding from the fact that changes to IR35 (off-payroll) have resulted in more unscrupulous tax avoidance schemes targetting workers who require umbrella payroll (PAYE). It’s disappointing to see. While most umbrellas are UK based and fully compliant with HMRC’s rules and regulations, some are preying on vulnerable workers and could be leading them down a dangerous path (possibly against the worker’s knowledge). Please keep reading as we explain the main differences between a compliant umbrella company and a tax avoidance scheme.
Compliant umbrella companies
Compliant umbrella companies will ensure you pay the correct tax and national insurance contributions to HMRC. You become an umbrella employee and receive employee benefits, including sick pay and maternity/paternity pay. There is no tie in periods with compliant umbrella companies. Every time you are paid, you will receive a payslip showing the deductions that have been made by the umbrella and sent to HMRC on your behalf. The only income compliant umbrella companies retain is the margin they deduct to cover administration and business costs.
Here are the main characteristics of compliant umbrella companies:
Based in the UK
If you are working in the UK, it’s sensible to assume your payroll company should also be based in the UK.
Have an established trading history on Companies House
Only consider using umbrella companies with established trading histories, not companies that have popped up overnight.
Good feedback
Good, reliable umbrella companies should have earned plenty of positive reviews on well-known reviewing platforms, such as Google and Trustpilot.
Compliant payroll services
Compliant umbrella companies process their employees’ payroll with Pay As You Earn (PAYE) payroll – HMRC’s tax system. They do not offer to inflate your pay retention.
Honest calculations
When you search for an umbrella company, it’s fair to assume you will have asked a few providers for taking home pay calculations. In reality, all compliant umbrellas process payroll the same way, and the only thing that’ll impact your pay retention is the umbrella company margin. However, it’s essential to check that any umbrella company calculations you receive are transparent and do not suggest foul play (such as unusually high retention, sometimes upwards of 90%).
Have an accreditation
There are two well-known self-regulatory bodies in the UK. These are the Freelancer and Contractor Services Association (FCSA) and Professional Passport. Both organisations work tirelessly to ensure the supply chain of temporary workers is compliant. For an umbrella to obtain accreditation from either the FCSA or Professional Passport, they are required to undergo a series of audits and assessments to ensure their internal processes are above board.
Tax avoidance schemes
With umbrella companies in higher demand than ever before, more and more tax avoidance schemes are targetting workers who may not be sure how umbrella payroll should work (PAYE).
Tax avoidance schemes help people retain more money by underpaying tax and National Insurance Contributions. Using a tax avoidance scheme could land you in serious trouble with HMRC, and they are constantly increasing their efforts to catch those who are using them. You must understand the main characteristics of a tax avoidance scheme to avoid using them at all costs.
Here are some of the most common characteristics of tax avoidance schemes:
Located offshore
Most tax avoidance schemes are located outside the UK in well-known tax-havens. These locations include but are not limited to the Cayman Islands, Bermuda, the Channel Islands, Isle of Mann and Indonesia.
Lack of trading history
Recently, there has been a rapid increase in dodgy payroll providers appearing what seems overnight. These companies are backed by directors with no experience and offer unethical payroll services to temporary workers. A recent example of this is mini umbrella company fraud (MUC).
Operate unusual payment methods
Tax avoidance schemes exist to help you pay less tax. Therefore, they offer unusual payment arrangements to bypass rules and regulations. For example, tax avoidance schemes (often referred to as disguised remuneration schemes) have been known to pay workers with loans, in shares, by issuing refundable credits and other eye-opening techniques. Remember, compliant umbrella companies operate PAYE, and you are expected to pay your fair share of tax and National Insurance Contributions (NIC). You should avoid any scheme offering to help you pay less tax and NIC – at all costs.
Odd terminology
The government acknowledges the existence of umbrella companies, but they do not endorse any. Plenty of tax avoidance schemes uses unusual wording in their marketing, including phrases such as “HMRC approved”. If you see anything like this, alarm bells should be ringing.
Basic website
The best umbrella companies will have detailed websites that explain exactly how their payroll process works (PAYE). However, a lot of tax avoidance schemes and unethical payroll providers will only have very basic information on their websites, and sometimes they won’t explain how they operate at all.
Lack of information about the company
Most tax avoidance schemes won’t have been around for long. What seems to happen is they appear, penetrate the market and then close down – leaving no trace of who was behind the company. By doing this, the criminals that operate tax avoidance schemes keep a low profile and are very difficult to identify. Therefore, before you commit to the services of an umbrella company, have a look inline at reviews etc. If an umbrella you’re considering has no reviews or you can’t find any information about them – it could well be dodgy and should be avoided.
Scheme Reference Number (SRN)
If HMRC is suspicious of a payroll company, they will issue it with a Scheme Reference Number (SRN). This basically means the company is under investigation. Never use a company with an SRN because you could be signing up with a tax avoidance scheme.
Read government guidance designed to help temporary workers understand umbrella companies
In 2021 (and over the last few months in particular), the government has proactively released several resources to help temporary workers and supply chain members understand umbrella companies. The guidance is well-worth having a look at because it covers all sorts – including an overview of working through an umbrella company, understanding umbrella company payslips and checking whether you’re at risk of having avoided paying the right amount of tax.
Here are some useful links:
- Working through an umbrella company
- Check if you are at risk of tax avoidance
- Check your payslip if you work through an umbrella company
- Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme
Additional resources on the umbrellacompanies.org.uk website
The Umbrellacompanies.org.uk site is full of information designed to help contractors and freelancers make well-informed decisions regarding their payroll. Hopefully, this article has helped explain the difference between a compliant umbrella company and a tax avoidance scheme. However, we have plenty of additional resources that you may find helpful.
Here are some of the resources we recommend you read before choosing an umbrella company:
- Umbrella companies explained
- Umbrella company margins
- Umbrella company example and walkthrough
- Umbrella company payslip example
- Advantages and disadvantages of umbrella companies
- Registering with an umbrella company
- Guide to expenses
- FCSA and Professional Passport accreditation comparison table
Top 10 umbrella companies
The Team at umbrellacompanies.org.uk has collated a list of our top 10 umbrella companies and we recommend you check them out if you’re looking for a new payroll provider. Every one of our top 10 is accredited by either the FCSA or Professional Passport, and some have special offers at the moment.
