Amazingly, “are umbrella companies illegal” is a very commonly searched phrase on Google. Therefore, we wanted to discuss why some individuals and organisations may not be happy with umbrella companies and why some parties may be campaigning for umbrella companies to be made illegal. Keep reading for more information.
Firstly – a quick answer to the question
Are umbrella companies illegal? No. However, some act unethically and promote tax avoidance. Tax avoidance is technically legal, but those who promote it or engage with such schemes are likely to face retrospective punishment. Therefore, take it from us – it is not worth it.
Engage with a compliant, ethical umbrella company – you have nothing to worry about. However, use a non-compliant umbrella company, such as a tax avoidance scheme or disguised remuneration arrangement – you could face severe punishment from HMRC.
It’s worth adding that if an umbrella company were running a tax evasion scheme – this would be illegal (because tax evasion is illegal). However, what we’ve seen recently is several non-compliant umbrella companies taking advantage of loopholes in UK tax law to inflate the pay of those who engage with them. For example, mini umbrella fraud recently came to light.
A minority of umbrella companies have given the industry a bad name
Believe it or not, there are over 500 umbrella companies in the UK. This gives contractors a tremendous amount of choice when deciding which payroll provider to use. A significant majority of these umbrella companies will process payments with HMRC’s tax system Pay As You Earn (PAYE) – making them compliant. However, it’s likely that a few umbrellas operate unethically and not under UK tax law. You must avoid these companies at all costs.
Recently, mini umbrella company fraud (MUC) was reported on again by the BBC. To put it simply, some honest workers have been pushed down the route of non-compliant umbrella companies completely against their knowledge. For example, in the case study reported on by the BBC, workers were only aware they were being paid by an unknown third party (mini umbrella company) when they received their payslip. This is terrible and something that needs to be stopped.
The example above is shocking, but it is rare. Most umbrella companies operate PAYE and are compliant. HMRC even acknowledges umbrella companies and how they operate. It’s worth reading their online guidance called: Working through an umbrella company.
Tax avoidance technically isn’t illegal, but…
Tax avoidance schemes and disguised remuneration arrangements set out to help people retain more of their money by paying less tax. They do this by exploiting loopholes in the UK tax system. Tax avoidance is technically legal, but it could still ruin your life.
HMRC is not afraid to retrospectively punish those who engage with unethical schemes – even if it was by accident. The controversial 2019 Loan Charge proves the lengths HMRC is prepared to recuperate unpaid tax and National Insurance Contributions.
Growing demand for the umbrella company marketplace to be regulated
As mentioned earlier in this article, some umbrella companies have given the industry a bad name. As a result, there is more demand than ever before by stakeholders for the umbrella company marketplace to be regulated. We’re certainly not opposed to the marketplace being regulated and our article ‘Should umbrella companies be regulated?’ explains why.
Anything that the government can do to stop non-compliant umbrella companies from preying on vulnerable, hard-working contractors and freelancers is good. The FCSA and Professional Passport are currently the two leading professional bodies determined to ensure the supply chain of temporary workers is compliant and ethical. Both professional bodies have strict codes that their members must adhere to. The government should work closely with both parties to produce industry-wide regulations.
Choose a compliant umbrella company and you have nothing to worry about
By choosing a compliant umbrella company, you have nothing to worry about. You’ll be paying the correct tax, and National Insurance Contributions (PAYE) to HMRC and your tax affairs will all be in order.
To ensure you use a compliant umbrella company, we recommend you only consider engaging with an FCSA or Professional Passport accredited umbrella company. These two professional bodies are dedicated to ensuring the supply chain of temporary workers is compliant with UK tax law. Effectively, both the FCSA and Professional Passport self-regulate the umbrella company marketplace. If the government regulates the marketplace, we sincerely hope they put a plan in action that includes the FCSA and Professional Passport.
Umbrella companies that have achieved accreditation by the FCSA or Professional Passport have undergone thorough audits and assessments. They have proven they operate compliantly with UK tax law and have their employees’ best interests at heart.
Avoid non-compliant umbrella companies and tax avoidance schemes
By choosing an umbrella company that isn’t accredited by either the FCSA or Professional Passport, you risk engaging with a non-compliant provider. We strongly suggest you don’t take such as risk. Non-compliant umbrella companies may enable you to retain more of your money and pay less tax. However, HMRC is likely to come knocking down the line, and the fine you face could be life-changing.
So, are umbrella companies illegal? The answer is no. Compliant umbrella companies process PAYE payroll for their employees in accordance with HMRC’s rules and regulations. However, there are non-compliant umbrella companies out there and engaging with these could potentially land you in serious trouble. Most tax avoidance schemes would argue their activities are legal, but tax avoidance could result in severe penalties in the future. Don’t ever be tempted to engage with a non-compliant umbrella!
If regulating the umbrella company marketplace helps to protect temporary workers, we’re all for it. However, the FCSA and Professional Passport are doing a marvellous job at the moment. If you choose a prover with an accreditation from one of these bodies – you’ll be in the safest hands.
Top 10 umbrella companies
If you’re looking for a compliant list of legal umbrella companies – you’ve come to the right place! We’ve collated our top 10 umbrella companies, and they’re accredited by either the FCSA or Professional Passport. Some have special offers at the moment – check them out!