As a result of the April 2021 Off Payroll changes, more individuals than ever are using umbrella companies. In an unregulated industry, the consequences of choosing an unscrupulous provider can be severe.
In this article, we explain how to spot the worst umbrella companies, and why you should steer well clear of dodgy operators. You should only ever use a legitimate UK-based payroll operation, without exceptions.
Examples of non-compliant payroll arrangements
Over the years, many non-compliant umbrella company models and payroll arrangements have come to light. Keep reading and we’ll summarise the most common models that contractors have come across while seeking an umbrella company.
Mini umbrella companies
Mini umbrella companies (MUC) have been in the news recently after a BBC investigation found that unethical mini umbrella companies were paying G4S workers against their knowledge.
The BBC’s report uncovered that recruitment agencies deliberately referred candidates to non-compliant mini umbrella companies to reduce their business tax and National Insurance Contributions.
The unscrupulous arrangement was only brought to light when a worker noticed they were being paid by an unknown third party – a mini umbrella company.
Loan schemes have been around for many years and epitomise an unethical payroll arrangement.
Rather than pay workers with PAYE, loan schemes process their clients’ pay with a combination of national minimum wage (NMW) and a loan.
The scheme provider will issue loans on the basis they’re not required to be repaid. Doing this makes the loan free from tax.
And by combining loan payments with the NMW – the scheme provider helps workers avoid paying the right amount of tax by claiming the payment options they are using are non-taxable.
However, these payments are no different to normal income, and therefore tax and National Insurance Contributions still apply.
Elective Deduction Models
In an Elective Deduction Model (EDM) arrangement, workers keep their self-employed status to reduce their tax and National Insurance Contributions.
Also, as workers are self-employed, holiday pay doesn’t apply and consequently, pay retention is likely to be inflated. If you notice a company promising to reduce or remove your NI contributions or boost pay retention, do not use them.
Other unusual arrangements
Criminals are always looking to create new tax avoidance arrangements. Over the years, all kinds of dodgy umbrella company arrangements and disguised remuneration schemes (arrangements involving loans) have come to light, including those above.
Another scheme that is worth mentioning was the job board arrangement. Workers were paid with a combination of the NMW and then issued credits for a job board which were then immediately transferred into cash – eliminating the tax. At least with this kind of arrangement, it instantly sounds suspicious. PAYE isn’t glamorous, but it’s how compliant umbrella companies will process their employees’ payroll.
In a recent article on Umbrella Companies, a contractor was faced with an unusual pay calculation from an obvious tax avoidance scheme. The company was promising inflated take-home pay by issuing the contractor with NMW and shares in the company. The shares would instantly be sold and converted into tax-free cash. Just like the job board arrangement – this sounds extremely dodgy and should be avoided at all costs!
Obvious signs of a non-compliant umbrella company
High take home pay retention
Compliant umbrella companies in the UK will process their employees’ payroll with Pay As You Earn (PAYE) – HMRC’s tax system.
Therefore, you should expect to be taxed accordingly and make the required National Insurance Contributions.
Everybody’s circumstances are different, and many factors will impact pay retention, but usually, contractors should expect to retain between 55 and 65 percent of their pay with a compliant umbrella.
Therefore, if you come across a company promising noticeably higher pay retention (sometimes upwards of 90%) – you should avoid them at all costs. It’s a tax avoidance scheme.
Located outside the UK
Companies House is a powerful tool that’s extremely useful when researching umbrella companies. Have a look and see where the umbrella company you’re interested in is registered.
If they’re UK-based – that’s a great sign. However, if there is no indication they’re in the UK, or you discover their HQ is in in a known tax haven such as the Isle of Man or the Cayman Islands – alarm bells should be ringing. Only use a UK-based umbrella company.
Unethical language such as “HMRC approved”
HMRC acknowledge umbrella companies, and proof of this is in the recent guidance ‘Working through an umbrella company’. However, HMRC does not actively approve or endorse specific umbrella companies. Therefore, if you come across an umbrella company claiming to be “approved by HMRC” or “HMRC friendly”, – you should be wary. These claims are not legitimate and may be a deliberate attempt to lure you into an unethical arrangement.
No history and a lack of reviews
When conducting due diligence on umbrella companies, check out their online reviews and overall reputation within the sector. Have a browse on the website of an umbrella you’re interested in and study their on-site page. Then, take a look at the Google and Trustpilot reviews. The Contractor UK forum is also a great place to read about other temporary workers’ experiences with umbrella companies.
Usually, tax avoidance schemes and unethical umbrella companies will not have much history. These types of businesses pop up overnight and target vulnerable workers over a short space of time. Once they’ve made some money, they tend to shut down almost instantaneously – before HMRC finds them. It’s an excellent idea to avoid an umbrella company if they’ve only been around for a matter of months.
Search the Companies House database and see who the directors are of the umbrella company you’re interested in using. Do they have a history of success, or are they completely new to running a business?
The company has been issued a Scheme Reference Number (SRN) by the government
If HMRC is made aware of a potentially unethical umbrella company or payroll scheme, they’ll issue it with a Scheme Reference Number (SRN).
Essentially, this is HMRC’s way of publicly acknowledging they are aware of the company and monitoring it closely to ensure it’s operating ethically. If you discover that an umbrella company you’re interested in has been issued with an SRN – do not use it.
An SRN number doesn’t guarantee an umbrella company is dodgy, but you know how the old saying goes – there’s no smoke without fire…
Extremely basic website with a lack of company information
A lot of unethical umbrella companies have really basic websites with hardly any meaningful information.
Make sure the umbrella companies you’re considering using have detailed explanations of how they work, up to date content and trustworthy information on their website.
Sometimes, if a company reveals very little about itself, it’s because its directors have something to hide.
How to pick a compliant umbrella company
Choose an umbrella company that’s accredited by the FCSA or Professional Passport
The government doesn’t currently regulate the umbrella company sector despite several stakeholders campaigning for immediate independent intervention. A majority of umbrella companies are indeed compliant. However, a few have given the industry a bad name, leading to the demand for regulation within the industry.
A recent report by the Low Incomes Tax Reform Group (LITRG) identified over 500 umbrella companies in the UK. With so many to choose from – how do you know which umbrella companies you can trust and which ones could potentially land you in serious trouble with HMRC?
While the umbrella company marketplace continues to operate without regulation, there are two self-regulatory bodies that exist to protect the supply chain of temporary workers. These are the Freelancer and Contractor Services Association (FCSA) and Professional Passport.
Both the FCSA and Professional Passport offer umbrella companies the chance to apply for their accreditations, and obtaining them isn’t easy.
Umbrella companies are required to undergo a series of assessments and audits to ensure they operate entirely by HMRC’s rules and regulations.
And, once an umbrella has earned FCSA or Professional Passport accreditation – they cannot afford to get complacent because they’re required to pass an annual audit.
Request a take home pay calculation
When you’re deciding which umbrella company to join, request an umbrella company calculation from each provider you’re interested in. Make sure they’re operating PAYE, and the calculation presents realistic pay retention.
Sneaky umbrella companies will often tweak their calculations to present higher pay retention inaccurately. They’ll do this by deliberately using a wrong tax code, including expenses when you’re not entitled to them, and by manipulating the hours you’ll work.
If you receive a calculation with some questionable figures, do not be afraid to challenge the umbrella company. If you don’t trust them – do not register with them.
Key Information Documents (KID)
If you’re working via a recruitment agency, you should be issued with a Key Information Document (KID) before registering with an umbrella. This document will give you an accurate indication of your pay retention and should be based entirely on your circumstances.
There are a lot of umbrella companies in the UK. While most are compliant, some are operating unethically and engaging with them could land you in serious trouble with HMRC.
There are plenty of ways to spot a dodgy umbrella company – some are obvious, and others are not. For starters, it’s essential you pick a company that’s definitely based in the UK and has an established reputation within the industry. Make sure they operate PAYE and have not been issued with an SRN.
More help on ITContracting.com
Visit our list of trusted PAYE umbrella companies as a good starting point.
FCSA-registered Umbrella Company UK has a special £12/week offer for ITContracting.com visitors – find out more here.
Churchill Knight Umbrella – £12/week offer. Payslips SafeRec verified. Very experienced team – find out more here.