What You Need to Know About Umbrella Schemes

Many people are entering so-called “Umbrella Schemes” without knowing that they may actually be committing tax evasion. It is important, therefore, that before signing any agreement with an umbrella company, you undertake the necessary background checks to ensure you aren’t leaving yourself vulnerable to an investigation by HMRC.

When considering schemes such as these, the golden rule to remember is ‘if it seems too good to be true, it probably is’. Professionals nationwide – mainly those on fixed-term contracts, locums or in temporary positions – are being enticed to join schemes that claim to offer them around 65-90% tax-free take-home pay. While tempting, it is not a good idea to accept such claims and join such a scheme at face value.

What is an umbrella scheme?

An umbrella scheme involves, in simple terms, the outsourcing of payroll. The umbrella company is a business that acts as a third party – or middleman if you like – between an employer and a contractor or an employer and employee.

According to an article published by the BBC in February 2017, UK government officials at that time estimated that 430,000 people in the UK were being paid through such schemes. Most commonly, these types of arrangements are currently used in sectors such as the construction, healthcare and hospitality industries; the kind that sees large numbers of temporary workers concentrating on short term projects.

The problem lies in a fine line between two types of umbrella scheme. One type of scheme is legitimate and outsources payroll functions while deducting and accounting for tax and NIC in full, and is commonly used by workers without any tax issues. The other type of scheme is tantamount to tax fraud and has been condemned as a malicious scheme that attempts to take advantage of its users by tempting them with unrealistic tax savings while charging a commission of 10% or more of the earnings paid.

This latter type of umbrella company can be tempting due to the false promise of a high proportion of tax-free take-home pay. However, these schemes are exploiting those involved – especially Britain’s temporary and part-time workers – and leaving them exposed to an investigation from HMRC, plus a large backdated tax bill complete with interest and penalties.

There are a number of problems inherent in these dishonest schemes, one of the most pressing being that HMRC are actively investigating both users and providers. Civil scrutiny is being pursued by HMRC into those who are using umbrella schemes for tax avoidance, and criminal investigations are underway amongst providers who have promoted them with the fraudulent intention to divert taxable income and deny HMRC the tax and NIC legally due.

How does an umbrella scheme work?  

Umbrella schemes outsource your payroll. An umbrella company effectively acts as the middleman between your employer and you as the contractor or worker, then process your fees or wages and accounts to HMRC for any tax and NIC due. This is all legal if the correct amounts of income tax and NIC are then being paid to HMRC.

However, some workers have been tricked into joining fraudulent umbrella schemes through deceitful ‘promises’ which claim that amounts which, in reality, are taxable earnings, can be converted by the promoter of the scheme into nontaxable receipts such as loans or fees. Promoters have been known to insist that you ‘don’t have to declare the scheme’ and that ‘the scheme is approved by HMRC’. It’s worth knowing that this is never the case. HMRC outrightly opposes such schemes and even if the provider supplies a scheme number, you should know that this is a dud and is not indicative of any ties with HMRC. HMRC will crack down hard on any abuse of the PAYE system, and so using such a scheme to pretend to be a self-employed contractor in order to pay less tax – when in reality you are an employee – will lead to corrective action by HMRC.

What to do now if you’ve been paid through a dodgy umbrella scheme

If you’ve now come to realise that your umbrella scheme is not above-board, you will need to take steps to resolve your position with HMRC immediately.

The first and most important thing to do is to seek professional advice, as you may be about to face a civil or criminal tax investigation. It is then important to contact HMRC to voluntarily disclose your involvement in the scheme as soon as possible. If you have paid less than 20% tax on the total amount you’ve received while under an umbrella scheme (whether it was described as pay or a loan) then you may have underpaid the tax and NIC legally due and will need to disclose this to HMRC. This is not the kind of situation where you can stick your head in the sand and hope that the problem will eventually go away. The longer you leave it, the worse the penalties are likely to be.  

For more information on umbrella companies and schemes, or for essential professional advice, contact Patrick Cannon today.