Umbrellas 3
  • Publish Date: Posted 11 months ago

Tax Non-Compliance in the Umbrella Sector

​Umbrella companies provide an invaluable role in the temporary/contract supply chain, providing their workers with employment rights and deducting the appropriate income tax and national insurance contributions. However, there are significant risks for non-compliance in the umbrella company market, as umbrella companies are responsible for processing millions of pounds worth of payroll, sometimes more, ensuring that the correct level of tax and NICs are passed over to the HMRC. If the correct level of NICs is not passed over, this could lead to potential consequences when it comes to state pension entitlements. Umbrella companies can be set up and liquidated very quickly, which means the HMRC isn’t able to monitor compliance effectively or take proper enforcement action if required. The umbrella market has become an unfair playing field, where legitimate umbrella companies are at a disadvantage.There are three options proposed to prevent tax non-compliance in the umbrella market, by changing incentives and behaviours in the temporary/contract supply chain:Mandating Due Diligence – whilst recruitment companies generally conduct their own due diligence on umbrella companies, the government is exploring a requirement for organisations contracting with umbrella companies to conduct mandatory due diligence. This would sit with either the end client of an employment business in a contractual relationship with and supply the worker to the end client. Penalties would be likely if mandatory due diligence did not take place.Transfer of tax debt that cannot be collected from an Umbrella Company to another party in the supply chain – the debt transfer provisions have already been introduced to support the off-payroll working rules to give the HMRC power to transfer the liability of unpaid employer duties to another supplier in the chain. This is how the HMRC proposes to collect unpaid taxes owed by a non-compliant umbrella company, in circumstances where the debt cannot be collected from the umbrella company themselves. Where umbrella companies generally hold low-level capital, it becomes difficult to collect unpaid tax, whether this is a result of fraud, error, or avoidance.Deeming the Employment Business which supplies the worker to the end client to be the employer for tax purposes where the worker is employed by an Umbrella Company, moving the responsibility to operate PAYE – it has been suggested that an effective way to prevent non-compliance by umbrella companies is to prevent them from handling gross funds. This would be achieved by the party sitting above the umbrella company in the supply chain to make the deductions of Income Tax and NICs from the fee paid for the supply of the worker’s services. This would stop non-compliant umbrella companies from incorrectly treating payments to workers as non-taxable, such as ‘loans’ which are often seen as avoidance schemes, if the tax has already been withheld and paid to the HMRC. It is likely that recruitment companies may choose to move away from using umbrella companies due to the complexities that become involved in the process of using umbrella companies under the options above. It is important to note that no changes have come into effect yet, however, we are staying across any developments that may come into effect in the umbrella market. If you have any questions surrounding any changes that may be coming into force, and which therefore may affect you, please do feel free to reach out to our experts at Gerrard White, who will be happy to talk you through the proposed changes. 01892 553355 | info@gerrardwhite.comRelated blogs:The Umbrella Market - Tackling Non-Compliance Off-Payroll Reform and how this has impacted the UK Contractor MarketIs your business protected? How to Ensure Compliance in the Supply Chain Admist HMRC's £161 Million Investment

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​Umbrella companies provide an invaluable role in the temporary/contract supply chain, providing their workers with employment rights and deducting the appropriate income tax and national insurance contributions.

However, there are significant risks for non-compliance in the umbrella company market, as umbrella companies are responsible for processing millions of pounds worth of payroll, sometimes more, ensuring that the correct level of tax and NICs are passed over to the HMRC. If the correct level of NICs is not passed over, this could lead to potential consequences when it comes to state pension entitlements. Umbrella companies can be set up and liquidated very quickly, which means the HMRC isn’t able to monitor compliance effectively or take proper enforcement action if required.

The umbrella market has become an unfair playing field, where legitimate umbrella companies are at a disadvantage.

There are three options proposed to prevent tax non-compliance in the umbrella market, by changing incentives and behaviours in the temporary/contract supply chain:

  1. Mandating Due Diligence – whilst recruitment companies generally conduct their own due diligence on umbrella companies, the government is exploring a requirement for organisations contracting with umbrella companies to conduct mandatory due diligence. This would sit with either the end client of an employment business in a contractual relationship with and supply the worker to the end client. Penalties would be likely if mandatory due diligence did not take place.

  2. Transfer of tax debt that cannot be collected from an Umbrella Company to another party in the supply chain – the debt transfer provisions have already been introduced to support the off-payroll working rules to give the HMRC power to transfer the liability of unpaid employer duties to another supplier in the chain. This is how the HMRC proposes to collect unpaid taxes owed by a non-compliant umbrella company, in circumstances where the debt cannot be collected from the umbrella company themselves. Where umbrella companies generally hold low-level capital, it becomes difficult to collect unpaid tax, whether this is a result of fraud, error, or avoidance.

  3. Deeming the Employment Business which supplies the worker to the end client to be the employer for tax purposes where the worker is employed by an Umbrella Company, moving the responsibility to operate PAYE – it has been suggested that an effective way to prevent non-compliance by umbrella companies is to prevent them from handling gross funds. This would be achieved by the party sitting above the umbrella company in the supply chain to make the deductions of Income Tax and NICs from the fee paid for the supply of the worker’s services. This would stop non-compliant umbrella companies from incorrectly treating payments to workers as non-taxable, such as ‘loans’ which are often seen as avoidance schemes, if the tax has already been withheld and paid to the HMRC.

It is likely that recruitment companies may choose to move away from using umbrella companies due to the complexities that become involved in the process of using umbrella companies under the options above.

It is important to note that no changes have come into effect yet, however, we are staying across any developments that may come into effect in the umbrella market.

If you have any questions surrounding any changes that may be coming into force, and which therefore may affect you, please do feel free to reach out to our experts at Gerrard White, who will be happy to talk you through the proposed changes. 01892 553355 | info@gerrardwhite.com

Related blogs:

The Umbrella Market - Tackling Non-Compliance

Off-Payroll Reform and how this has impacted the UK Contractor Market

Is your business protected? How to Ensure Compliance in the Supply Chain Admist HMRC's £161 Million Investment

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