Umbrella contractors, here’s the HMRC tax liability you can expect from an avoidance scheme
Now you’re attuned to spotting the shades of grey which exist between the ways that organisations process payroll non-compliantly, it’s important to recognise that the article demystifying those shades, and the promised follow-ups of which this is one, relate to payroll processing as a whole, not just by umbrella companies, writes Sebastian Sauca of SafeRec.
Remember, one hue of payroll organisation operating out there today is in our Orange category. For reference, ‘orange umbrellas’ are only compliant when they need to be -- meaning they are ready to cut corners as soon as they see an opportunity.
Below is a real-life example of an orange umbrella. And of course, to spare the blushes of any similarly-named company, the umbrella’s name is totally made up. Although that doesn’t mean its name doesn’t hold any significance!
Setting the scene: orange brollies often have reputable partners
In this example based on a real-world contractual chain we’re aware of, an honest recruitment agency engages with a seemingly complaint (but actually ‘orange’) umbrella company. Let’s call the umbrella company Jekyll Umbrella.
The agency onboards Jekyll after conducting thorough ‘due diligence.’ Jekyll Umbrella appears compliant, so the ‘due diligence’ phase has been passed by Jekyll with flying colours.
The agency adds Jekyll into its PSL and presents the umbrella to their workers as one of the umbrella companies their candidates can use, following an internal vetting process.
When an orange umbrella shows its true colour
After 12 weeks on the PSL, 32 contractors got in touch with Jekyll asking to be paid. However, when the contractors called the umbrella, they are presented with a choice.
And that choice goes a little something like this:
“You can work through Jekyll Umbrella and be paid normal PAYE. Or you can use a new model we have just launched to optimise your earnings. Don’t worry it is perfectly compliant, it has been approved by HMRC, and you will be able to receive a lot more money as take-home pay.”
If the contractor decides to choose the first option, they will be paid compliantly by Jekyll Umbrella, in a standard PAYE model. However, if the contractor chooses the ‘tax optimisation’ option, they will be paid in a tax avoidance scheme. Let’s call this offering from Jekyll, Hyde.
Using Hyde (also a fictious name) as a contractor, the end-client’s money for your hard work gets sent from the honest agency to Jekyll, which will redirect the money to Hyde. Then Hyde will onboard you, the worker, onto a tax avoidance scheme.
In this example (which aligns with a situation we know about), out of the 32 contractors, 17 were reasonable individuals who chose to work through Jekyll Umbrella. But 15 weren’t, deciding to work instead through Hyde.
Quick reminder if you missed my initial article in this series, Jekyll is clearly an ‘Orange’ umbrella (compliant when it needs to be, but quietly never saying ‘never’ to non-compliance) and Hyde is a ‘Red’ umbrella (an outright HMRC rule-breaker).
Tax liability if you use a contractor avoidance scheme, like Hyde
The key question is, how much risk is involved, financially, and who is at risk?
If you are a worker or an agency owner, you might be aware of the chain and particulars outlined above. But to reiterate, what type of HMRC liability lies underneath for you or your business?
Please note, the below numbers are real-life numbers.
What does risk look like for a contractor involved in a tax avoidance scheme?
|Via Jekyll Umbrella||Via Hyde Umbrella|
|Total contract value for one week||£1,490||£1,490|
|Paid directly to the worker without being taxed||£0||£970|
|Gross income on payslip||£1,325||£332|
|Income tax paid||£288||£18|
|National insurance contribution paid||£94||£10|
|Net pay to the worker||£942||£1,273|
|Unpaid tax each week||£0||£354|
|Unpaid tax each year (46 weeks)||£0||£16,284|
What does risk look like for an agency with 15 workers through Hyde without knowing Hyde is a scheme?
|Via Jekyll Umbrella||Via Hyde Umbrella|
|Total contract value for one week||£22,350||£22,350|
|Paid directly to the worker without being taxed||£0||£14,550|
|Gross income on payslip||£19,871||£4,980|
|Income tax paid||£4,320||£270|
|National insurance contribution paid||£1,410||£150|
|Net pay to the worker||£14,135||£19,102|
|Unpaid tax each week||£0||£5,310|
|Unpaid tax each year (46 weeks)||£0||£244,260|
Please note, the figures in the tables above only cover the amount of unpaid tax. They do not include any penalty that HMRC could apply!
Real-time auditing: would you refuse it if you had nothing to hide, unlike Hyde?
In an industry fraught with complexity and potential pitfalls, the challenge for agencies and contractors is knowing whether they can trust the companies with which they partner.
Traditional, in-person audits on a date which the umbrella can prepare for can only provide assurance up to a certain point. And typically, such audits only offer a snapshot in time.
We believe that when the stakes are high – and I can’t think of a better word than ‘high’ to describe the £16,000+ and £244,000+ which HMRC could come after you for as a contractor and agency respectively, something more is needed.
Our view is that such a ‘something’ has to come from technology, and we think real-time auditing -- at source -- of outsourced payroll providers is just the ticket. We even certify those who pass the real-time audit. As to those umbrellas who don’t want a real-time, continuous check-up of their risk management, systems/processes and compliance procedures; that’s for them. Who knows, maybe you should ask such brollies WHY they don’t want this up-to-the minute scrutiny.
Orange and Red Umbrellas? Just say no…
With confidence, we can assert that in the scenario outlined above, the agency and the contractor could have benefited immensely from real-time auditing, as there simply wouldn’t be room for the tax avoidance scheme to occur.
Is it not time for recruitment agencies and contractors to understand they hold their destinies in their own hands, by acknowledging that they have the tools available -- should they wish to pick them up -- to say a firm NO to future Jekylls and Hydes?