Contractors, check your umbrella company isn’t a Loan Scheme in disguise

When is an umbrella company employee, not really an umbrella company employee? Answer? When it’s really a Loan Charge scheme user who stands to be investigated by HMRC, and who’s giving the scheme provider a financial buffer against their own HMRC investigation!

In more ways than one, the above is no joke, writes Carolyn Walsh, managing director of Andraste Accounting. It’s actually happening right now, and shockingly, could happen even more widely once PSC contractors turn to ‘umbrellas’ – or what they think are umbrellas – as IR35 reform is rolled out to all engagers (bar small companies) from April 2020.

Before delving into the details, the quickest way to check that your umbrella is a genuine PAYE umbrella (not a loan scheme provider dressed up as a genuine umbrella), is to check the total amount paid to the umbrella company.

Once you subtract the umbrella’s payment and subtract HMRC’s liabilities, do the figures stack up? Or is there 25% potentially missing? You need to make these checks because some of these fake umbrellas are withholding between 20 and 25% of their users’ incomes.

What they do with that slice of income is anyone’s guess – pure enrichment perhaps because you, the user, are not going to get it back. But the smart money is on the prospect that your missing 25% – which the fake umbrella wants you to overlook or make you think is your deducted tax bill – is going towards a financial buffer that the provider it is building for when an HMRC inspector calls.

Oh, and you too could find yourselves in the same sort of hot water with HMRC, because you used the scheme – that you thought was an umbrella. In other words, when HMRC moves to close the scheme, the withheld amounts are used to pay the Loan Scheme provider’s liability, while you – the unsuspecting ‘employee’ face an investigation, possibly with your own tax debts looming.

Rather unhelpfully, even HMRC quietly admits that with 25% deductions from income, taxpayers are being too easily hoodwinked into thinking everything is above board with their umbrella (who’s really a Loan Scheme provider).

The only positive is that this ignorance could be used as a defence in your case, but not if you knew this has happened. So if you’re careless with your tax affairs, penalties can apply. Yet being hoodwinked is not indicative of ‘carelessness’ and so it is possibly a defence against any HMRC penalty, including the loan charge. And if the terminology used by HMRC in its current investigations is anything to go by, it looks like the next batch of scheme victims could have already been found. A slight annoyance for HMRC must be that the actual HMRC liabilities that these scams – sorry ‘schemes’ owe, are very minimal.

The most insidious providers I’m seeing are the ones who  having been previously caught by the Revenue, but who set up new schemes -- in 2016 and onwards after the Budget that year unveiled the Loan Charge, and ensured they were structured with the 20% -25% deduction of each user’s income.

So the providers appear to be covering their backsides by withholding this money – your hard-earned cash -- which are not statutory deductions, and which basically adds up to fraudulent behaviour. Irritatingly, HMRC says it’s all a civil matter, but the legal costs are so high no one can afford to fight it -- if they are even aware that it’s happening to them.

For now, at the very least, new umbrella user sign-ups should look at whether they were actually paid the full amount they expected, albeit taking into account statutory deductions of course, as it may become their defence later. If some do challenge the umbrella company for the return of withheld funds, all the better. Remember, it’s not definitive what the withheld 25% is for. These providers may just be swindling people for no other reason than they are crooked, but a means to pay their liabilities is much more likely.

So to reiterate, and to give you further proof of what I said at the outset -- that all of this isn’t a laughing matter -- as no joke should ever need explaining, let alone telling twice:

If you’re paid part salary, part loan or other form; check the umbrella company hasn’t withheld any money in excess of statutory deductions.

If you find out that it has, then this non-joke might, for once, be on them!

Profile picture for user Carolyn Walsh

Written by Carolyn Walsh

With over twenty years’ experience in the sector, Carolyn assists freelancers, contractors, agency and umbrella company workers, interpreting tax legislation and guidance with a no-nonsense approach.
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