Using an umbrella company is a simple, hassle-free way to get paid as a contractor, and the majority of umbrella companies operate in a compliant fashion. Unfortunately, there are a few unscrupulous tax avoidance schemes that disguise themselves as umbrella companies, and using one of these could land you in a lot of trouble with HMRC. We’ve written this article to help you spot the warning signs of a tax avoidance scheme, and to help ensure you do not fall victim to one!
1. The company is advertising high take home pay rates
Arguably the most significant warning sign of a tax avoidance scheme is that a company is advertising high take home pay rates. Keeping upwards of 80% of your earnings after tax and operating compliantly is not realistic, and the only way they can increase your take home pay is by reducing the amount of tax you pay. Promoters of tax avoidance schemes will pay you a small portion of your salary via PAYE and the rest through a job board, loan scheme or credit scheme.
Payments made through these loan or credit schemes are made without any deductions for Income Tax or National Insurance Contributions (NICs). This in itself is a clear warning sign of a tax avoidance scheme, and you should be suspicious of any complicated or unusual payment processes. These schemes will always be challenged by HMRC as soon as they discover them and you could end up facing sizeable underpaid tax bills.
2. They are actively promoting tax relief on expenses
As of April 2016, contractors working through employment intermediaries, such as umbrella companies, are no longer able to claim tax relief on travel and subsistence costs if they are deemed to be working under Supervision, Direction or Control (SDC). If you are working through an umbrella company, you are likely to be subjected to SDC, and for this reason, many compliant providers no longer allow expenses as part of their service offering. Therefore, if you see an umbrella company actively promoting that they’ll allow tax relief on expenses – it is probably not a legitimate scheme and should be avoided!
3. The company has been issued with a Scheme Reference Number (SRN)
A Scheme Reference Number (SRN) is another warning sign of a tax avoidance scheme. An SRN number is issued when HMRC has identified the umbrella company or intermediary as a potential tax avoidance scheme and are in the process of investigating it. Using a scheme with an SRN number presents a massive risk as you are potentially engaging with a tax avoidance scheme and you could have underpaid tax.
4. They’re based offshore
An obvious warning sign of a tax avoidance scheme is to see if the company has registered address in the UK or another country. Several tax avoidance schemes are based outside of the UK and are often operating in known tax havens such as the Isle of Man or the Cayman Islands.
5. Use phrases like “HMRC approved”
You may spot phrases such as “HMRC approved” or be told that HMRC has approved the scheme and it is safe to use. This is not the case, HMRC does not approve schemes, and the likelihood is that these schemes are not compliant with HMRC at all.
6. Lack of company information
Does the company’s website list the address, company number or registered name? A warning sign of a tax avoidance scheme is that they often have very little, if any, information about the company online. This is because these companies don’t want to be found by HMRC. And, as soon as they are, they disappear. All too often leaving contractors facing substantial tax bills.
7. Difficult to contact
Tax avoidance schemes are often difficult to reach and will offer support via email only, usually because they are located in a known tax haven. This makes it incredibly difficult to get an answer to any queries you may have. If the provider you are considering using does not provide a telephone number for you to contact them on, it may be because their operations are not entirely legal.
8. Target lower earners
Sadly, these schemes will often target lower earners offering false hope that they can keep more of their hard-earned money. Only recently, unscrupulous tax avoidance schemes made the news for targeting former NHS workers who were returning to work to help fight the spread of coronavirus.
Always use an FCSA accredited provider for complete peace of mind
Searching for a reputable umbrella company might sound tricky, but don’t worry, there are sure signs you can look out for to ensure you are registering with a compliant and trustworthy provider. Just look for the FCSA accreditation! The FCSA are the UK’s leading independent auditor for payroll companies and their strict code of compliance ensures their members are operating ethically and legally.