Umbrella companies seem to be all over the news recently, particularly with regard to the growing numbers of non-compliant firms. Recent weeks have seen numerous news stories regarding umbrella company fraud, such as revelations about “mini-umbrella companies” set up to abuse VAT rate initiatives and employment allowance.
Non-compliant umbrella companies may seek to tempt contractors into using them by offering things such as reduced tax or higher take-home pay. Often in these scenarios, it is the contractors that (sometimes unwittingly) use these fraudulent umbrella companies that lose out.
As a result, it’s no wonder that freelancers are becoming increasingly wary of taking up an umbrella company offer that seems “too good to be true”. However, as umbrella companies compete to attract freelancers (particularly in the wake of IR35), there are many compliant firms that will be offering genuine discounts and initiatives that could be of great value to contractors.
Therefore, for contractors who are choosing their umbrella company, it will be well worth knowing what kind of offers are genuine and legal and which are tell-tale signs of a non-compliant umbrella company that must be avoided.
In general, it is worth bearing in mind that any umbrella company that attempts to attract contractors by saying that they will “pay less tax” is non-compliant. An umbrella company offering this is likely operating a tax avoidance scheme and engaging with them, no matter how tempting it may be, could lead to serious consequences for contractors (i.e. severe HMRC fines).
Similarly, umbrella companies that promote themselves with unrealistically high take-home pay should also be avoided at all costs. Umbrella companies that offer, for example, 90 per cent take-home pay, are almost certainly not abiding by PAYE regulations – again putting contractors at risk of punitive action.
Any umbrella company offering these kinds of bonuses must be avoided. However, beyond this, if umbrella companies are merely offering bonuses such as discounted margins, faster payment, free or discounted insurance, rewards schemes or gifts for joining, then these are legitimate offers that contractors are free to take advantage of.
Author: Steven English