Their marketing may also attract an individual by using phrases such as lower tax bills, or less paperwork.

Since the governments implementation of the Off Payroll Working rules, and HMRC’s investigations more individuals have found themselves in an unwanted spotlight, because the individual is ultimately responsible for their tax liabilities, being involved in a tax avoidance scheme, only ever rebounds back onto the individual, never the Umbrella Company.

From HMRC’s records, one contractor shared his story through HMRC to make others aware of what can happen.

The IT contractor - Duncan’s story

Duncan is 55-years-old and trades as a Self-Employed IT project manager/contractor. He’s married with two children and lives in London. When he started working as a contractor, he chose to use an umbrella company to help him manage his payroll admin, reducing additional paperwork and freeing up family time.  He found an umbrella company through a comparison website. Duncan admitted that he didn’t ask enough questions about the arrangements he ultimately signed up to, so ended up in a tax avoidance scheme.

Duncan was lucky as HMRC spotted discrepancies in his PAYE data. That meant HMRC could contact Duncan and were able to step in quickly. But that’s not always possible, so no-one should ever assume their arrangements are fine because they haven’t heard from HMRC.

In Duncan’s case, after communicating with HMRC, he was left with an additional tax bill, and realisation that the fees the umbrella company had levied had obviously been a waste of money.

Duncan wished he had taken more time to consider what he was signing up to and had asked more questions. If he had, he would have spotted the warning signs of tax avoidance.

Some of the warning signs:

•         the offer of increased take-home pay when signing your new contract of employment
•         signing a loan agreement in addition to your contract of employment
•         paying a high fee on his gross pay for the umbrella company to set up your new employment contract and calculate your monthly earnings
•         a choice of three complex pay arrangements that all split your monthly earnings into two payments
•      accepting the consultant’s and customer relationship manager’s advice that the payment scheme was vetted and legal without seeking a second professional opinion

Duncan went onto explain:

I did an online search for umbrella companies and came across a comparison website. I spoke to one of the guys there, filled in a form and he suggested three companies. He said, ‘these people have got this process in place, and it pays this much’. I just chose one of them, they got me set up and that was it.

When I got the letter through from HMRC my first thought was ‘that was quick’. I had only started using the umbrella company a few months earlier, which was still the same tax year. I had a couple of sleepless nights at the start – that was really the worst part.

After speaking with HMRC:

I spoke to someone at HMRC and that settled things down. Financially there wasn’t too much impact as fortunately, I hadn’t spent all my money and had saved some of it. Obviously, there was a tax bill which was painful. But by that point I knew it was coming, so I had been able to prepare for it.

What happened next?

Duncan was unable to recover the high fees he paid to the umbrella company totalling £7,600. The umbrella company said he had willingly signed up to the arrangements, agreeing to their payment model and the associated fees. Duncan also had to pay the outstanding Tax of just over £12,000, plus interest because the tax was late.

It is wise to remember the old saying:

If it sounds too good to be true it almost certainly is.

Don’t get caught out by tax avoidance, so:

·         Stop - don’t sign anything that you are uncomfortable with or don’t understand

·         Challenge - check for warning signs, challenge what you see, ask questions

·         Protect yourself, protect others - report tax avoidance schemes to HMRC

Tips for understanding Umbrella Payroll.

·         Ensure the employer gives you time to check out your options, you should not be forced down a particular track.

·         Contact at least 3 umbrella companies and ask them for personal illustrations on how your income will be treated. All illustrations should be very similar with the umbrella company’s margin probably being the different factor.

·         Beware of low ‘margin’ costs, as there may be additional fees for transacting such as holiday pay, etc. When added together you may pay more than a company offering a fixed fee. Be aware of exactly what the costs to you are.

·         Have time to read the terms and conditions fully, if unsure speak to a professional accountant.

To read more personal stories around tax avoidance schemes you can visit.

https://taxavoidanceexplained.campaign.gov.uk/

Foremans UK Ltd is a fully compliant Umbrella payroll provider.

contactus@foremansllp.com for more information.