Don’t use umbrella companies touting ‘free payroll services,’ contractors warned

Contractors are today urged to steer clear of “free payroll services” by umbrella companies because it could land them -- as individuals -- a massive HMRC tax bill.

Like any other business, umbrella companies need to turn a profit, so being able to offer a PAYE service with no fee for its users isn’t commercially viable.

But that fundamental tenet of business has been lost on 13 agents, as that’s how many recruiters contacted Orca’s Robert Sharp asking whether the freebie was worth a punt.

‘Long-established umbrella company touting free services’

And not 13 agents tempted to commit their agency to “free” contractor payroll services in the last week, but 13 agents tempted by it in a little over 24 hours.

The boss of umbrella company Orca Pay Group, Mr Sharp says worse still, one of the touters of the ‘free service’ was convincing to the agents because it is a “long-established” umbrella.

“I’ve had SEVEN emails about these guys,” he said of the household umbrella company.

“We have full audit reports showing… [them] committing all sorts of non-compliance, ranging from mini-umbrellas…to making gross payments into contractors’ bank accounts.”

‘Dubious or downright illegal’

This is exactly how the providers of ‘free payroll services’ need to operate however, according to Hannah Morrison, senior associate at law firm Brabners.

“[They] likely make their profit in a dubious or downright illegal way, such as by operating fraudulent mini-umbrellas or not paying the correct…tax to HMRC,” she told ContractorUK.

The legal adviser warned: “This could lead to costly personal liabilities for contractors in the long term, who may find themselves facing an unexpected tax bill.

“Umbrellas operating in this way may also seek to avoid paying contractors their holiday pay or sick pay, or avoid honouring other rights which come with being an umbrella employee.”

‘Lower paid workers and the take-home-conscious targeted’

The irony is that other than agents trying to get a deal, the targets of ‘free payroll services’ are the very workers for whom holiday pay and other statutory entitlements matter most.

“I do wonder if they are chasing the lower paid workers,” says Clarity Umbrella’s managing director Lucy Smith.

“These companies will target those who are focusing on cost [including agents] or focusing on higher take-home.

“Although we’re all feeling the pinch right now, these [offers] could end up with you facing huge tax bills and fines from HMRC. These will completely outstrip any [initial] saving”.

‘Cost of living crisis’

Sharp confirmed in a post to questioning contractors that “it will be YOU carrying the bill for any unpaid liabilities”.

He also confirmed that with the cost-of-living crisis continuing, the underhanded umbrellas have timed their offering perfectly.

“In the current climate…[‘free’] is the word that is getting plenty of attention and interest,” Sharp said.

“The cost-of-living crisis is hurting many of us, but trust me it will be a lot worse should you enter down one of these routes.”


Brabners, which sits on umbrella accreditation body the FCSA's panel of legal assessors echoed: “Contractors should avoid umbrella companies purporting to offer their services for free.

“Umbrella companies have overheads to pay for like any other business, and they need to earn a profit on the service they provide. Umbrella companies are businesses, not charities; their services [should] come at a cost.”

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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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