Comparison websites marketing umbrella companies are not always what they seem

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As part of their ongoing commitment to raise awareness of tax avoidance schemes targeting contractors, HMRC issued a warning about umbrella comparison websites.

Comparison or broker websites are intermediaries that introduce contractors to umbrella companies. They often rank and rate the umbrella companies based on various criteria in the same way as other online comparison sites.

The new guidance highlights the problem of tax avoidance schemes using these sites to gain access to contractors, who are often unaware of the risks of entering such a scheme. A recent report published by IFF found that most contractors that had entered tax avoidance scheme were unaware that they were doing anything wrong. It is likely that compliant umbrella companies will appear on the comparison site alongside non-compliant tax avoidance solutions. Increasing the risk that contractors will sign up to these schemes believing them to be compliant.

The guidance confirms that if you enter a tax avoidance scheme, even unwittingly, the unpaid tax and national insurance remains your responsibility. If HMRC investigate in the future, you may also have interest and penalties to pay alongside the fees you have already paid to the tax avoidance scheme promoter.

Warning signs

It is not always easy to spot a tax avoidance scheme. They will often deliberately conceal how they operate and will do everything then can to appear compliant.

  • HMRC approved – Very often, tax avoidance schemes will state that they are ‘HMRC approved’ in order to convince contractors that they are legitimate. The new guidance confirms that umbrella companies are never approved by HMRC.
  • Pay illustration – Always ask for a full breakdown of your pay and all deductions. If you are working through a recruitment agency you should be provided with a Key Information Document, which will include a pay illustration. If the illustration from the umbrella company differs materially from this document, you should query why.
  • Income omitted from payslip – Your payslip should show all your contract income and the required PAYE tax and national insurance deductions. If any part of your income is omitted, you should query this.
  • Higher take home pay – Any claims to increase your take home pay or reduce your tax liability should be viewed with suspicion. All compliant umbrellas will apply PAYE tax and NI to your pay, after retaining their margin.
  • Lack of information on their website – Does the website list their company name, address and company number? It is typical for tax avoidance scheme promotors to omit such information and they may just have a form that you must complete to get further information.
  • Signing up to additional agreements - You may be asked to sign additional agreements relating to the tax avoidance scheme. A compliant umbrella will only ask you to sign a contract of employment.

Using one of these arrangements can be very costly in the long term and it is reassuring that the government is taking steps to educate contractors about the dangers of these schemes. However, more must be done to take action against the promoters of these schemes which often have devastating consequences for the contractors that are caught up in them.

Currently the umbrella industry is not regulated, although following recommendations made in The Good Work Plan this is expected to be introduced soon. We welcome this move as it would bring much needed peace of mind for contractors, some of whom still fall victim to these shady schemes. Until then, the best course of action is to use an FCSA approved umbrella company.

Why you can trust Parasol

As founding members of the FCSA and APSCo affiliate members, compliance is at the core of all we do. We’re passionate about driving standards within the umbrella industry and we actively support the government’s measures to shine the light on unscrupulous schemes.

We believe educating our employees and agency partners and keeping them up to date with the latest legislation is key. If you have any questions about tax avoidance schemes, we’re here to help. Call us on 0800 464 0530 or drop us a message and we’ll be in touch.