Are HMRC stating 20% of umbrella companies are not compliant?

HMRC have recently released their annual report “Use of marketed tax avoidance schemes in the UK (2020-2021)” which details the latest findings about tax avoidance schemes in the UK.

In this article, we look a little deeper into some of the findings in the report and how they might be interpreted, including the idea that 1 in 5 umbrella companies are non-compliant. 

2022 was a big year for the umbrella industry. Still struggling under the burden of a lack of regulation, compliant umbrella companies continue to fight for the legislation that is desperately needed to protect contractors and compliant umbrella service providers. 

In the meantime, as of April this year, HMRC now publishes information on tax avoidance schemes, suspected promoters and those connected to avoidance schemes, to warn individuals against those with a known history of tax avoidance.

How are non-compliant umbrella companies and tax avoidance connected?

The HMRC reports states that in “2020 to 2021, circa 99% of the avoidance market was disguised remuneration schemes.”

In providing employment services, umbrella companies are obliged to deduct taxes and NIC’s under PAYE on workers’ pay. Non-compliant umbrella companies will often attract contractors by advertising higher rates of pay, or tax savings by using disguised remuneration. 

These companies make payments to workers in a contrived way, either through a third party, or directly in the form of a loan, grant, advance, shares, or similar arrangement, to disguise the amount of income tax and NICs due on earnings. Most non-compliant umbrella companies last a maximum of two years, before they close, with the people involved going on to set up a new scheme.

In practice, the contractor is left with a huge tax bill.

Naming and shaming

Because many tax avoidance schemes are run by serial offenders, in 2022 HMRC began a name and shame list, which includes the details of tax avoidance schemes and promoters of tax avoidance schemes. And up until September 2022, there were a total of 18 promoters and 20 schemes on the list. 

The report also says, “we estimate there are currently around 70 to 80 non-compliant umbrella companies involved in the operation of disguised remuneration avoidance schemes.” This brings the current estimated total of non-compliant umbrella companies to around 100.

And with the umbrella market at approximately 500 companies, this has the potential to mean that 20% of umbrella companies are non-compliant.

How to avoid non-compliant umbrella companies

With the umbrella industry unregulated, it sadly attracts dubious suppliers who want to fly under the radar and make some fast cash.

This means that contractors and end-hirers are at risk of unwittingly getting caught up in a tax avoidance scheme.

However, umbrella employment itself is a valid and legitimate model, which provides a highly useful service to both contractors, who want stability of employment combined with the freedom of working on multiple contracts, and end-hirers, who want to avoid the costs and resources involved in being an employer. 

Compliant UK umbrella companies will be well established and will have their company listed in the UK. They will also be entirely transparent and up front about any fees, as well as offer basic employment rights including holiday pay and SSP. If your umbrella company doesn’t do this, it’s time to ask some questions or move to a different brolly.

Is Ship Shape an umbrella company?

Ship Shape is not an umbrella company. We are employment and payroll specialists, and umbrella is just one of the employment and payroll models we offer to clients and contractors. We also offer PEO, CIS, Self-Employed and Bureau.

As employment specialists, our umbrella provision is completely compliant and transparent, and we lend our voice to the growing swell in the industry calling for regulation of umbrella companies.

If you would like to find out more about the employment services we offer, don’t hesitate to get in touch.