A new Government consultation into the umbrella industry is calling for evidence, and contractors must share their experiences and help shape the market, says Crawford Temple, CEO of Professional Passport, the UK’s largest independent assessor of payment intermediary compliance.
“The long-overdue consultation appears to be a genuine attempt by policymakers to better understand umbrellas, says Temple, “and is a golden opportunity for contractors to shape the future of any legislative or regulatory protections to help keep them compliant and avoid dodgy tax avoidance schemes.”
Avoidance schemes have proliferated
Since the Off-payroll legislation was rolled out into the private sector earlier this year, there has been a proliferation of disguised remuneration (“DR”) schemes which unwitting contractors are being duped into.
The schemes operate by paying a small portion of a contractor’s earnings via PAYE and disguising the remaining larger part of the income as something else, often in the form of a loan, growth shares, or annuity.
Recent analysis by TaxWatch shows a dramatic increase in DR schemes despite government attempts to clamp down. TaxWatch calculated that in 2013-14, there were 13,200 people in DR schemes, more than doubling to 28,000 in 2019-20.
How do DR schemes get into the market?
The scheme providers mask themselves very well, giving them a competitive edge over the compliant ones. But, all umbrella companies should apply the same rules and the contractor’s take-home pay should broadly be the same.
Any umbrella offering higher than expected take-home pay should be avoided, along with payments in the form of loans, grants, or advances. A ‘QC’s opinion’ or “HMRC approved” is a tell-tale sign of potential wrongdoing.
Worryingly, the IR35 Impact survey by IR35 Shield revealed 78% of contractors are unable to detect a tax avoidance scheme – so something must be done to protect them.
The danger for contractors unwittingly drawn into a scheme is ending up with a life-changing tax bill. If a contractor enters an aggressive scheme that is “too good to be true” HMRC will pursue them for unpaid taxes, and not the promoter.
Contractors should sign up for a Personal Tax Account with HMRC, which they can do online at https://www.gov.uk/personal-tax-account. Earnings on payslips can then be regularly checked to ensure the taxes are correctly paid and reported to HMRC.
Why is the Government calling for evidence now?
The pressure on Government from vocal industry experts and stakeholders to shut down DR schemes mounted considerably over the past year – to the point something had to be done. The Government now fully recognises that the umbrella sector must be regulated.
The impact of the Loan Charge on innocent contractors has likely been a factor. HMRC is well-aware that they would not be allowed to repeat the fiasco. It is crucial that HMRC steps up its enforcement activity and pursues the promoters of the schemes for the unpaid tax rather than the contractors.
Lately, HMRC has been issuing warning letters to many contractors suggesting that they might be caught up in a DR scheme, but many letters have been sent to compliant contractors. Contractors receiving misguided letters should respond to the call for evidence to share their experience of being wrongly accused of avoidance.
For those contractors who have been duped into a scheme, this is a great opportunity to clearly explain how it happened.
How to detect a dodgy umbrella scheme
Half a million contractors have been impacted by the new Off-payroll rules and many have been offered no choice but to sign up to an umbrella company to continue working. So, it’s important to discern the difference between a compliant umbrella and a non-compliant umbrella.
A compliant umbrella should:
- Employ you
- Give you all statutory rights & benefits of employment
- Give you the flexibility for numerous different end-hirers
- Consolidate your pay from numerous hirers into one pay packet
- Process the full amount of your gross pay through PAYE
You may be involved with a dodgy scheme if:
- you are offered, or receive, a higher-than-expected return.
- your provider has significantly higher fees but you are taking home more money than with other providers.
- you are asked to sign loan agreements, investment or annuity documents.
The market agrees that DR schemes must be closed down, but HMRC has been slow to act and slow to enforce its own rules. The lack of enforcement has allowed them to thrive.
Temple says: “I would urge contractors to share and air their views on umbrella working with the Government so that a fair system can be put in place that protects contractors from being caught up in schemes that will punish them and their pockets significantly.”
Contractors can read the consultation document here and can email evidence to umbrellacompanyevidence@hmtreasury.gov.uk
The closing date is February 22nd, 2022.