In recent years, certain companies promoting non-compliant freelancer solutions have wrongly begun marketing themselves as umbrella companies. For contractors lured into using them, this can lead to sizeable, back-dated bills, while recruitment agency directors who recommend them can face criminal prosecution.
As it can be tricky to spot non-compliant umbrella companies, we’ve listed some of the common types and some of the warning signs to look out for.
Mini umbrella companies
In this instance, scheme promoters set up numerous limited companies, each employing a small number of workers, with the intention of taking advantage of Employer’s National Insurance allowance for small businesses as well as flat rate VAT.
Warning signs include newly incorporated businesses, if the employer name on the payslip does not match the scheme promoter and/or if the employer’s National Insurance (NI) number is missing.
Offshore arrangements aimed at freelancers and contractors typically mean the correct UK tax is likely not being paid, therefore making them a form of tax evasion and leaving the contractor liable for future tax bills.
Such schemes can be easily spotted if the umbrella company is not UK-based or if the take home pay seems too high.
In a bid to take advantage of the 2017 public sector IR35 reforms, some promoters lured in contractors with generous take-home pay, some of which was paid as a “loan”. However, the tax on these loans was unpaid, leaving those who used these companies facing large HMRC bills.
Again, warning signs include high take home pay and a newly-incorporated business, as well as failed companies or multiple failed directorships.
Elective deduction models
These companies, which can come in several forms, pick and choose which deductions are paid or not. For example, if a worker is engaged on a services contract rather than as an employee, meaning holiday pay and Employer’s NI are not paid, but the scheme “elects” to pay these for the worker.
These are also companies in which contractors might see overly high take-home pay or a missing Employer NI number on their payslip.
Spotting a non-compliant umbrella company
As mentioned above, some of the crucial warning signs to look out for include: high take-home pay (80-90 per cent or more), indicating statutory deductions aren’t being made; an overseas address, indicating a non-UK tax arrangement; a newly incorporated business, which may lack the expertise or integrity to remain compliant; directors with previous failed directorships, indicating untrustworthy senior leaders.
Other potential red flags could be: companies stating on their website that they are “HMRC compliant” or “QC Approved”, this is false as HMRC does not give endorsements to umbrella companies; or contracts in the supply chain (i.e. contracts for the recruiter and the umbrella company) that do not match.
Often, a non-compliant umbrella company can be spotted by discrepancies on payslips. Always ensure that the Employer’s NI is stated, that entitlement to holiday pay is clearly marked, that the name of the paying company matches the scheme promoter and that tax and NIC deductions have been made on the whole income.
Author: Steven English