HMRC has updated its guidance for companies using temporary labour to reduce the risk of using an umbrella company that uses tax avoidance schemes
Some umbrella companies are non-compliant and operate disguised remuneration schemes. These schemes claim to prevent certain payments made to workers from being taxable. They aim to do this by describing taxable earnings paid to a worker for doing their job as something that is non-taxable instead.
The umbrella company will operate PAYE on part of the amounts paid to the worker, while the remaining amounts paid are treated as non-taxable and so not subject to PAYE. These are often described as loans, salary advances or credit facilities.
It is important to note that the rules state that if you engage with an umbrella company operating an avoidance scheme, you become ‘part of the supply chain of the scheme’.
There is also a tough penalty regime for any abuse of the tax system. If the umbrella company operates a tax avoidance scheme, you may incur a penalty for enablers of tax avoidance. This penalty applies to those who design, market, sell, manage or otherwise enable the use of abusive tax avoidance arrangements which are later defeated by HMRC in court.
The critical issue to consider is whether by contracting through the umbrella you become an enabler of tax avoidance.
The guidance states: ‘If you enter into a contract with and make payments to an umbrella company operating an abusive tax avoidance scheme, you may have enabled the use of that arrangement.’
The penalty is 100% of the fees receivable in consideration for any actions taken by you which enabled the arrangements. If you receive an enabler penalty, HMRC may also be able to publish your details, which will publicly identify you as an enabler of defeated tax avoidance.