Google shows how some brollies are lagging behind the law

If the results of the world’s most popular search engine are anything to go by, the UK’s umbrella companies have some catching up to do in their taking account of recent and not so recent legislation, writes Lisa Keeble, managing director of ContractorUmbrella.

In fact, if you type ‘umbrella company’ into Google and glance the paid adverts, probably the most common word used is ‘compliant.’ One ad, for examples, says ‘100% HMRC complaint.’ This sort of statement is often being made in conjunction with the promise of high take-home pay – ‘up to 90% after tax’ for example.

It all begs the question; can an umbrella company be compliant and yet still net their users 80-90% take-home pay? The simple answer is ‘no,’ and that’s mainly because of new and existing legislation, specifically in four areas.

1/False self-employment

Some umbrella companies claim that they are able to generate high take-home pay for their users, on the basis that the scheme involves the worker being registered as a sole trader. That sounds fine until you read this: False Self-Employment. These rules say that if you work through an agency and you are subject to supervision, direction and control, or there is a right to subject you to these three, then you must be paid as an employee and not a sole trader.

2/Offshore intermediaries legislation

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Everyone knows that there are tax havens and, unfortunately for their users, that includes the taxman, whose ‘No Safe Haven’ proposals are a fierce response. But what’s specifically stopping you putting your money with an offshore umbrella company, if your contract was secured through a recruitment agency, is this piece of legislation, which took effect from April.

3/‘Pay-up first’ avoidance rule

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Some umbrella companies are defending their ‘scheme’ by saying that it is backed by a leading tax QC, or someone similar, and that they will defend their position in court with ‘no risk’ to you, the user. We don’t agree with the ‘no risk’ bit but the rest (up until recently) was true. That’s because HMRC now has the power to issue Follower Notices, which make you pay your taxes up front if the scheme that you are using is similar to one that they have already defeated.

4/Disguised Remuneration legislation

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Other umbrella companies say they can boost your take-home pay (in comparison to other providers) and are HMRC-compliant because their company’s arrangement hinges on a loan scheme. These once popular vehicles were stamped on from the 2011/12 tax year by the Disguised Remuneration Legislation, which remains in force.

Final thoughts

In addition, there is a fifth element that undermines the claims that some umbrella companies are making by touting ‘90% After Tax.’ To explain, a true umbrella company will operate PAYE. But the starting rate of income tax is 20% so the ‘90%’ figure just can’t stack up. Bear in mind the fee that the provider will take from you, plus the legally required payment of National Insurance Contributions, and the claim is even more flimsy.

If in doubt about an umbrella company ‘solution,’ find out before you proceed by consulting an independent or reputable source, such as ContractorUK’s Contractors’ Questions or Roger, the former taxman, over at All Umbrella Companies are Equal. The Revenue is on-hand to assist too and, since the onshore intermediaries legislation came into force, it has set up an inbox for taxpayers to flag up models suspected of breaching the law. More and more, there are sure-fire ways to find out from a safe distance whether all that glitters in the umbrella company space really is gold, or not.  

 

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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