How to spot a non-compliant umbrella company

Most UK umbrella companies operate honestly and ethically, ensuring all statutory deductions are made, and the contractor’s pay is accurate. However, the term ‘umbrella company’ has more recently been ‘hijacked’ by many businesses looking to promote their non-compliant solutions to the temporary labour market, often to benefit themselves.

As a contractor, using non-compliant models could leave you facing large, backdated tax bills from HRMC. For recruitment agency directors, criminal prosecution for failing to prevent tax evasion under the Criminal Finance Act 2017 could be the reward for turning a blind eye to compliance.

But spotting a non-compliant umbrella company can be tricky. Where do you start?

 

Types of non-compliant models

 

Before we discuss the warning signs for non-compliant umbrella schemes, let’s take a look at the different types of non-compliant solutions that are currently being offered to contractors and employment agencies.

 

Mini Umbrellas

HMRC is currently targeting this non-compliant solution. The scheme promoter sets up many limited companies, with a small number of workers employed by each company. These schemes take advantage of the Employer’s National Insurance (NI) allowance for small businesses and flat rate VAT. You can find more information about this type of scheme on HMRC’s website.

 

What to look out for: Employer on payslip not matching the scheme promoter, newly incorporated business, and/or Employer’s NI is missing.

 

Loan Schemes

As a result of unscrupulous scheme promoters taking advantage of the public sector IR35 reforms in 2017, they aimed to promote generous take-home pay by paying some of the worker income as a ‘loan.’ Little did the worker know that the tax was unpaid, and many workers have subsequently faced large tax bills that are eye-watering from HMRC.

 

What to look out for: Take home pay appears too high, and/or newly incorporated business, failed or has multiple directorships.

 

Offshore Arrangements

Luckily, most people understand that ‘offshore’ frequently spells trouble. While not all offshore arrangements are non-compliant, those aimed at the temporary labour market often fall on the side of tax evasion rather than avoidance. The correct UK tax is unlikely to have been paid, leaving the worker at risk of future tax bills and any recruitment agency at fault for allowing tax evasion to occur.

 

What to look out for: Non-UK based companies and/or take-home pay appears too high.

 

Elective Deduction Models

These solutions come in many forms, cherry-picking what deductions are paid, and which are not. In the simplest form, the worker is engaged on a contract for services (not as an employee), and therefore holiday pay and Employer’s National Insurance are not paid. However, the scheme promoter ‘elects’ to pay tax and NIC for the worker. 

 

What to look out for: Employer’s NI is missing and/or take-home pay appears too high.

 

How to spot a non-compliant company checklist

 

You can use the following checklist when considering appointing an umbrella company or to your current provider(s):

 

Question to Ask

Warning Signs

  • Are they UK-based with a UK company registration number? 

An overseas address could be an indication of different, non-UK tax arrangements.

  • Is the business newly incorporated?

New companies may lack the expertise to remain compliant or may be more willing to bend the rules to grow.

  • Who are the directors?

Previous Directorships of insolvent businesses, those with CCJs, or a large number of failed companies may indicate senior management that ‘phoenixes’ companies.

  • Does the promoter website use statements such as ‘HMRC compliant’ or ‘QC approved’? 

These claims are false; HMRC does not endorse anyone umbrella company.

 

  • Does the take-home pay seem high? 

If the take-home pay is 80-90% or more, the model is likely to be uncompliant. Several statutory deductions need to be made. If it’s too good to be true, it often is!

  • Do the contracts in the supply chain match?

Check that the terms of business between the recruiter and the scheme promoter match the same company that contracts.

  • Get a copy of an example payslip:

 

    • Is the Employer’s NI stated on the payslip?

Request a copy of an example payslip. Genuine employers must pay for this employment cost. A lack of it will often indicate an uncompliant model.

    • Is there holiday pay? 

 Employees are entitled to holiday pay, and this should be clearly marked on the payslip.

    • Does the company name paying the worker match the scheme promoter? 

You want to be sure the payments to workers are not made through a third party.

 

    • Are tax and NIC deductions made on all of the income? 

If one part of the payment doesn’t appear on the payslip, it may indicate no tax or NIC contributions being paid on this portion.

 

If you are looking for a compliant umbrella company for your contractor workforce, check they’re FCSA Accredited:

 

 

This article was written by Rob Wilks, Director at Clipper Contracting Group (FCSA Accredited Member firm)

 

Disclaimer: We have taken care to ensure that all information is provided is accurate and valid at the time of publication. Legal advice should always be sought before implementing any changes to processes and practices.

 

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