How to spot an uncompliant umbrella company

“Umbrella Company” is a very common term in the contracting industry however not all umbrella companies are equal and some are just outright uncompliant. The UK has one of the most active contact markets and an unfortunate consequence is some companies look to take advantage of uncompliant solutions.

Regardless if it’s tax evasion or avoidance both are wrong and the old saying “if it seems too good to be true, it is”, the same exists in the umbrella market. Many umbrellas give you false figures based on assumptions to display a high retention rate but let’s be honest tax is tax and umbrellas are a PAYE solution, the figures should match across the board.

However, spotting a dodgy or uncompliant umbrella company isn’t that easy as over the years they have managed to disguise the business process to help people pay less tax. Bear in mind, most if not all of these solutions if caught, lay the liability from HMRC at the contractor’s doorstep.

So, today I’m going to identify the 2 main uncompliant umbrella company models and how to spot them:

Model 1 – Loan Schemes

Loan schemes have been in the news over the past few years as well know individuals have been investigated and found to be avoiding tax by using these types of models. Essentially a loan scheme takes the money you have earned and either deducts a small amount for PAYE tax or in some cases makes no deduction for tax. But then they offer you your money under a loan agreement which is not subject to income tax. Sound legit right? Well, some people thought so until HMRC came knocking and asked for the unpaid tax and then levied a fine on top. The phrase “short term gain equals long term pain” comes to mind. 

So how do you spot one of these loan schemes, easy, read the T&C’s this will explain that the payment is a loan and will seem more like a loan application rather than an employment contract. Additionally, these businesses promote high retention rates. As a rule of thumb if it’s over 65% then you need to start asking questions.

Finally, it’s commonplace to be advised not to declare the loan scheme to HRMC, this is just another red flag that something isn’t right.

Model 2 – Offshore Companies

This one has been around for so many years it’s shocking that they’re still used, but they are! While not all offshore models are uncompliant when it comes to contracting in the UK most of them are. The model is structured in a way where your income is received from the umbrella company that is not based in the UK and normally are registered in a low tax region. The process is you pay taxes in the offshore country rather than the UK and yep you guessed evade paying UK taxes.

The golden rule to keep safe is to pay taxes in the country where you are performing the work.

Spotting this is fairly simple, check where the business is registered and if it’s not the UK then give it a miss.

To close this out

Whilst there are other ways companies try to help avoid paying the right amount of tax these are the most common ones. Let me leave you with some rules to follow to help keep you safe:

  1. If the retention is higher than everywhere there is a reason for that and not a good one
  2. Check where the business is registered in the country you’re working in
  3. Read the T&C’s and if it doesn’t seem right to ask or backout, don’t sign and hope for the best
  4. Check your payslip every time
  5. Check if the umbrella company has undertaken an external audit

And there you have it, stay safe when it comes to tax as HMRC will come knocking.

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