Follow up

HMRC Spotlight 45

[Weblink]

Warning to umbrella company users

Spotlight. HMRC has published helpful information about several tax avoidance schemes as part of its “spotlights” series. The name arises from the fact that the schemes in question are particularly under HMRC’s scrutiny at the time of publication. The latest, Spotlight 45 (see Follow up ), is concerned with perceived abuse through the use of umbrella companies.

Umbrella? Umbrella companies have actually been commonplace, especially since the awkward introduction of IR35 legislation two decades ago. The basic premise is that the company enters into a contract with a recruitment agency to act as an employer. End users contract directly with the umbrella company for workers, which the recruitment agency sources. The company invoices the end user for work done by its employees, takes a commission from the amount paid, then pays the contractor via the PAYE system. In practice, one of the main benefits for the contractor is that they don’t have to form their own company to secure contracts. If there is no need to employ an accountant there is a saving in administration costs.

HMRC. The spotlight stresses that most of these companies comply with their tax responsibilities. However, the focus is on companies who are offering your clients unrealistic returns. If your clients are being told that they can keep 95% of their earnings if they sign to another umbrella company, you should alert them to the spotlight. It is likely that these arrangements revolve around similar lines as employer or contractor loan schemes, which HMRC is vigorously attacking, with numerous successes at tribunal.

Pro advice. It’s important to stress to your client that merely using an umbrella company is not going to get them into trouble, so there is no automatic cause for concern - but if they are being remunerated in unrealistic terms, for example payments of 30% “salary” and 70% “deductible (non-taxable) expenses”, they should question whether the arrangement is a realistic representation of the engagement.

HMRC Spotlight 45