HMRC has issued a warning about agency and umbrella companies offering to reduce workers' tax liabilities and increase take home pay as they are in effect tax avoidance schemes.

Most employment agencies and umbrella companies operate within the tax rules. However, some umbrella companies and agencies promote arrangements that claim to be a ‘legitimate’ or a ‘tax efficient’ way of keeping more income by reducing tax liabilities.

These arrangements can leave workers at risk because they are ultimately responsible for their tax affairs and for paying the correct amount of tax and National Insurance contributions.

These types of arrangements are likely to result in them needing to pay additional tax, interest and perhaps penalties, and are never HMRC approved.

How these arrangements work

These arrangements may work in different ways, but the companies that use them claim they will help the worker keep more of their income and reduce paperwork.

They will say that the payment is non-taxable because it doesn’t count as income as it’s a loan, credit, or something similar. These payments are actually no different to normal income, and tax and National Insurance contributions are payable.

The company may also say it’s necessary to sign up to these arrangements in order to work for them.

How payments are made

The arrangements may vary but this is an example of how they operate.

  1. A small payment is received which has tax and National Insurance contributions deducted.
  2. At the same time (or shortly after) a larger payment is received without tax and National Insurance contributions deducted.
  3. The larger payment may arrive from a different account than the first payment, potentially from overseas, although not necessarily.
  4. Any payslip may show the larger payment separately and refer to it as something other than pay. No tax or National Insurance contributions have been deducted.

What to check

Check whether:

  • the company promises retention of 80%, 90% or 95% of wages and is tax compliant (this is unlikely to be true as, in most cases, the basic rate of Income Tax is 20% and National Insurance contributions are also due on earnings)
  • only a fraction of the salary is paid through payroll and subject to PAYE (indicating that tax is only being paid on some income)
  • Payment is being made using a loan, credit or investment payment and the company claims this isn’t subject to income tax or National Insurance contributions (this is tax avoidance)
  • the payment from the umbrella company is routed through various companies before being received
  • These companies may say they are compliant with tax rules but this shouldn’t be relied on. These companies do not always explain the risks of using these schemes or try to hide the fact they involve tax avoidance.

The risks of using these schemes

Arrangements like these that claim its’s possible to pay less tax are extremely high risk.

HMRC will always challenge tax avoidance schemes. If people are involved in an arrangement like this, it’s highly likely they are avoiding tax and could end up paying additional tax, National Insurance contributions and interest. Penalties may also apply.

In our experience previous users of avoidance schemes were often told that their arrangements were HMRC compliant, but later found out, to their cost, this was not true.

What you should if you’re involved in these types of arrangements

If you think you’re involved in this type of arrangement, or have used one in the past, you should seriously consider withdrawing from it and settle your tax affairs with HMRC. The Bedrock team has considerable experience of assistance of managing the settlement process for clients to make sure they pay the right amount of tax and aren’t caught by the 2019 Loan Charge. Read more here or give us a call today to discuss how we can help you.

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