Only the bogus umbrella companies justify the protests

There’s perhaps only a single type of umbrella company that can justify this week’s protests on the streets of London and other UK cities, and that’s the one which isn’t actually an umbrella company but claims to be, writes Lucy Smith of All Umbrella Companies Are Equal (AUCAE).

These bogus umbrella companies, often recognisable by the tell-tale pitch of ‘low risk, high rewards,’ try to convince workers that their outfit is a genuine PAYE umbrella. They even track down potential users to tell them of their authenticity!

In fact, more than two-thirds of respondents to a survey on the AUCAE website admitted that they have been approached by tax avoidance promoters, calling themselves ‘umbrella companies,’ offering ‘high reward, low risk’ schemes.

What’s more worrying is that despite anti-avoidance moves by the taxman being more numerous than ever before, not to mention penalties being harsh, many contractors are prepared to ‘chance it’ on such schemes because they could not resist the extraordinarily high take-home pay claimed to be on offer.

These schemes operators seem very credible and are shrewd. Each is claiming to be an ‘umbrella company’ because they have cottoned on that since the onshore intermediaries rules took effect in April, umbrella companies are a compliant way for workers affected by that law to operate.

Unfortunately though, awareness of the legislation (known as the ‘false self-employment’ rules) beyond this unscrupulous group appears extremely low. Specifically, more than 7 in 10 of our survey’s respondents (who included contractors) confessed they hadn’t heard of the April rules. Another set of rules, governing offshore intermediaries, emerged as just as much a mystery, as roughly the same large proportion of respondents hadn’t heard of those either.   

One subtext to the first finding could be that contractors can see a steady stream of their colleagues joining umbrella companies and even though the cause of that stream - the 'false self-employment regs' - isn’t familiar to them, they feel it’s safest to go with the flow.

Such a dynamic seems visible today in the construction sector. As those protesting in Westminster and Holyrood will tell you, a law took effect in April with the effect that thousands of them who for years had been in the CIS scheme all of a sudden got hit for PAYE which, if their pay rate hasn’t increased, has cut their take-home pay significantly.

With tax avoidance schemes posing as umbrella companies because schemes promoters know that such companies are necessary for many formerly self-employed workers, and in light of many people who once used such schemes explaining on internet forums how they’ve been caught out by HM Revenue & Customs, one can begin to understand why the protesters are, unfairly, branding umbrella companies as an ‘exploitative con.’

I say ‘unfairly’ because there has been no attempt by the protesters to separate the professional and reputable payroll providers from the bogus ‘umbrellas’ -- those avoidance promoters masquerading as umbrellas or actual umbrellas using underhand, unethical methods. It’s as a result of this failure to distinguish by the protest organisers that some genuine umbrella companies who proudly support flexible workers are reluctantly considering dropping the term ‘umbrella company’ for a less sullied alternative to describe what they do.   

But it is HMRC where the ultimate solution probably lies. Indeed, without some form of response by the authorities (tax or otherwise), these protests organised by the UCATT union could potentially run and run, with no resolution for the aggrieved. It’s been suggested this week that the real issue is a lack of communication to the protesters – the workers. Well, our survey results throw up the same suggestion. If more than 70% of people don’t know about the onshore intermediaries rules, and the same big majority don’t know about the offshore intermediaries rules, then surely the tax department urgently needs to launch an awareness campaign on both the frameworks.

When the two sets of rules came into force, there were many articles published by the contractor press, industry bodies and staffing groups, but it seems the message just didn’t get across. Maybe it’s that people just didn’t want to hear about the offshore or onshore intermediaries rules. Or maybe they heard it but only by the time it was too late – in this case, months after their April commencement. More likely though is that the information about either framework’s implications from HMRC was just not as targeted by the department as it should have been.

There’s also a credibility advantage that the taxman has but appears not to have exploited. There’s lots of misinformation about the rules in the marketplace – not just from the bogus umbrellas (- avoidance promoters posing as umbrellas or underhand umbrellas), but from misinformed articles and oversimplified reporting. In short, the tax authority should have strived to issue considerable plain English guidance for workers hit by the false self-employment crackdown, and then made sure it reached them. A HMRC-run Q&A webinar twice or three times for the first few weeks following the introduction of the rules would have helped too. Although it’s now probably too late for the Revenue to take such actions, the tax authority could at least devote a section of its website to ‘temporary workers’ and the issues which affect them, with a ‘Ask HMRC’ facility. At least that way there’d be a path before protest that the UK’s independent, industrious workers might be inclined to take.        

Editor’s Note: Related Reading –

Contractors' Questions: Is this tax scheme too good to be true?

Why you may be taxed like an employee, minus their protections

Contractors' Questions: Who’d be liable for false self-employment?

Contractors' Questions: Will false self-employment rules hit PSCs?

Contractors' Questions: Do the onshore intermediary rules exempt composites?

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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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