Essential Information to Spot Non-Compliant Umbrella Companies.

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Essential Information to Spot Non-Compliant Umbrella Companies.

6th April 2019 is going to be a particularly significant date for a large proportion of the UK’s interim workforce. Especially those who have had the misfortune to find themselves using a non-compliant umbrella company to manage their payroll and tax affairs whilst working on fixed term contract assignments.

The controversial and much disputed ‘Loan Charge’ is set to be introduced on the 6th April 2019 in an attempt by HMRC to reclaim unpaid taxes from contractors who (whether knowingly or unknowingly) used non-compliant umbrella payroll companies. Unfortunately, due to the vast number of interim contract assignments across the social care sector, there will be many practitioners who have been caught up in these schemes who can expect to receive a very large back dated tax bill in the near future.

What is a contractor loan scheme?

There are a large number of non-compliant umbrella payroll companies on the market who promote various tax avoidance schemes which (supposedly) enable contractors to take home a high percentage of their contract value – usually somewhere in the region of 80% – 90% take home pay. Whilst there are many variations of these schemes, they are usually structured in a way where part of the contractor’s payment is made to them in the form of a loan. As loan payments are not subject to tax and national insurance deductions the contractor takes home a higher percentage of their earnings.

However, according to HMRC these umbrella loan schemes simply do not work. HMRC categorise loan payments made through these schemes as a form of ‘disguised remuneration’. Instead of being regarded as a genuine ‘tax free loan’ HMRC deem these payments as disguised income. Subsequently, the full amount of income tax and national insurance deductions should have been applied when the payment was made to the contractor. The upcoming loan charge is HMRC’s latest initiative to clamp down on those who have used these schemes and reclaim the unpaid taxes.

How to spot the warning signs

It’s worth remembering that not all umbrella companies operate these non-compliant loan schemes (or variations of them). Most professional umbrella companies are fully compliant with tax and employment law legislation and act responsibly on behalf of the contractors they represent. Unfortunately, the reckless actions of the non-compliant providers tarnish the reputation of the umbrella payroll industry.
So how can you identify if an umbrella company is operating a payment scheme that is literally ‘too good to be true’? Here’s a few pointers to help you make an informed choice regarding your umbrella payroll arrangements.

Is the take home pay unrealistically high?

Any umbrella companies who offer 80 – 90% take home pay are, without question, operating some form of tax avoidance scheme. Under the UK’s PAYE tax structure, it is impossible for a typical interim social care practitioner to take home this amount unless their payments are made through a tax avoidance scheme of some description. A compliant umbrella company should enable you to take home between 60% – 70% of your contract value.

Be vigilant about ‘Approved’ umbrella companies

Just because your recruitment agency has an ‘Approved List’ of umbrella companies for you to choose from, this doesn’t guarantee the umbrella companies on the list are fully compliant. Your recruitment agency might be very relaxed about which umbrella companies they include on their approved list. They may even recommend the services of an umbrella company in return for a large referral fee (not because of the quality of their service or commitment to compliance).

‘Don’t tell your agency’

Alarm bells should start ringing if your umbrella company asks you ‘not to tell your recruitment agency how much you are taking home’. Most recruitment agencies are fully aware of how non-compliant umbrella companies operate and will do everything they can to avoid working with them. So, if your umbrella company asks you not to disclose your take home pay to your recruitment consultant, it’s because they don’t want them to find out what they are doing behind the scenes to increase your take home pay.

Do you receive multiple payments?

There shouldn’t be any reason for an umbrella company to make multiple payments to you. You should always receive 1 payment for the period you have worked. Using the example of the contractor loan scheme, the umbrella company typically makes a small salary payment to the contractor followed by a much larger payment (in the form of a loan or something similar). If your umbrella company makes 2 payments to you, it is likely they are operating a tax avoidance payment solution.

Does the umbrella company hold professional accreditation?

There are reputable professional trade bodies who rigorously audit umbrella payroll companies to make sure they comply with tax legislation. For example, umbrella companies who are accredited members of the FCSA (Freelancer & Contractor Services Association) have been independently assessed by solicitors and accountancy firms as meeting the highest levels of compliance and best practice in the industry. If you register with an accredited member of the FCSA you can be confident they will manage your umbrella payroll arrangements compliantly.

If you have any questions about the issues covered in this article or have any concerns about your current umbrella payroll arrangements, speak to a member of our team who will help you find the support you require.

While you're here...

We believe in giving something back to the social work community. We are constantly striving to exceed on Matt Hughes’ original vision for One Stop Social as the place where social workers obtain knowledge and resources. To this end we are working with a number of like-minded organisations to provide you with the tools you need. We want to give back to the practitioners who are members of our social work collective; OSS Membership is not only a forum for our community but also our way to connect social workers with valuable resources and more that will help develop good practice.

2019-02-22T15:43:11+00:00
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