What is a non-compliant umbrella company?

Compliant umbrella companies provide a much-needed service, offering the freedom to work flexibly, knowing that their tax responsibilities are taken care of.

However, the umbrella industry is unregulated, meaning it operates without governmental oversight. As such, the industry is open to abuse by many tax avoidance schemes, which claim to be above-board and compliant umbrella companies. This leaves self-employed workers at financial risk. Those who work via tax avoidance schemes – whether knowingly or unknowingly – are liable for any unpaid taxes as a result of using a scheme. 

In this article, we explain the difference between compliant and non-compliant umbrella companies, and how you can spot a tax avoidance scheme in the guise of an umbrella company.

What makes an umbrella company compliant?

In simple terms, a compliant umbrella company deducts all relevant taxes from its workers’ pay and makes those payments to HMRC.  The Freelancer and Contractor Services Association (FCSA) provides accreditation for umbrella companies that adhere to its Code of Compliance, which has input from HMRC and the government department for Business, Energy and Industrial Strategy (BEIS). As a result, the FCSA is considered the gold standard in industry compliance. You can see all the FCSA compliant umbrella companies here.

How can I tell if an umbrella company is non-compliant?

While it’s easy to unknowingly fall into the trap of working through a non-compliant umbrella company, if you know what to look out for, it’s not difficult to steer clear of tax avoidance schemes altogether. Here’s how to check if an umbrella company is compliant:

Too good to be true take-home pay

A non-compliant umbrella company will typically promise high levels of take-home pay – often over 80%, which is impossible to achieve even at the lowest rate of Income Tax.

Convoluted payment processes (e.g. loan)

Disguised remuneration schemes often try to ‘disguise’ your salary payments as something else, like an offshore loan, to avoid paying tax. 

HMRC approved

An easy one to debunk: HMRC doesn’t approve, certify or accredit schemes. So, any umbrella company claiming to ‘HMRC approved’ isn’t telling the truth. 

Non-taxable income

All income is taxable, apart from your tax-free personal allowance (£12,570 for most people). Everything you earn above that threshold is subject to tax, so any umbrella company promising non-taxable income is likely using creative ways to pay you – which means the payment could well be avoiding the taxman.

All of the above are warning signs of non-compliant umbrella companies. This isn’t a complete list of red flags, however. There’s more advice on gov.uk, where you learn about other signs of tax avoidance schemes.

What do I do if I realise my umbrella company is non-compliant?

While HMRC has recently stepped up its approach to identifying tax avoidance schemes, the tax office hasn’t uncovered all of them.  Suppose you suspect or know that you’re working through a non-compliant umbrella company. In that case, you should report them to HMRC as soon as possible. 

How do I report a non-compliant umbrella company?

You can contact HMRC to report a non-compliant umbrella company if you think it’s operating as a tax avoidance scheme. HMRC will investigate any firms or individuals that they suspect to be involved in any element of tax avoidance, including the scheme’s design, its promotion and its operation.

It’s also worth keeping an eye on the government’s active list of known tax avoidance schemes and the promoters, enablers and suppliers, which is regularly updated. 

So, there are plenty of ways to spot non-compliant umbrella companies – and once you know what to look out for, you can avoid getting involved in a tax avoidance scheme. To recap, keep an eye out for pay disguised as a loan (along with other complicated payment processes) and don’t fall for promises of too-good-to-be-true take-home pay.

With over 20 years of experience, Parasol is a trusted provider of compliant umbrella solutions. To find out how we can help you, please request a callback and one of our friendly experts will be in touch.