Analysis shows that umbrella companies were used to engage at least 700,000 workers in 2022 to 2023. This also shows that at least 275,000 of these workers, and likely significantly more, were engaged at some point in 2022 to 2023 by umbrella companies that failed to comply with their tax obligations.
These schemes can leave taxpayers with substantial tax bills
Data shows that £500 million was lost to disguised remuneration tax avoidance schemes in 2022 to 2023, almost all of which was facilitated by umbrella companies. These schemes can leave taxpayers with substantial tax bills. Hundreds of millions more was lost to so called ‘mini umbrella company’ fraud and other fraudulent attacks by people abusing umbrella company structures.
The government will bring forward legislation to change who has responsibility to account for Pay As You Earn (PAYE) where an umbrella company is used in a labour supply chain to engage a worker. This will move the responsibility to account for PAYE from the umbrella company that employs the worker to the recruitment agency that supplies the worker to the end client. Where there is no agency in a labour supply chain, this responsibility will sit with the end client. This will take effect from April 2026.
HMRC undertakes communications activity to warn workers of the dangers of getting caught up in tax avoidance schemes operated by rogue umbrella companies and to help them to spot the warning signs.
They uses real-time data to quickly identify people who might have entered tax avoidance schemes, writing to those identified within 2 months to help them to exit the scheme before they build up large tax bills.
HMRC also investigates and pursues non-compliant umbrella companies using its enforcement powers. However, the ease with which new umbrella companies can be created means that the individuals behind these non-compliant structures can quickly establish new ones and attempt to relaunch them into the umbrella company market.
Impact on end clients
In the majority of cases, the government understands that workers employed by umbrella companies are supplied to end clients by an agency.
However, if the end client is in a direct relationship with the umbrella company, then the end client will be responsible for accounting for PAYE. It will be for the end client to decide whether it will operate PAYE itself or will choose to outsource this to the umbrella company.
Impact on umbrella companies
Umbrella companies will no longer be legally responsible for operating PAYE.
Impact on workers
Workers will continue to receive their pay net of income tax and NICs, although the business providing their payslip may change.
By reducing non-compliant umbrellas, this measure will prevent workers from being engaged by non-compliant umbrella companies, no longer being party to non-compliant tax arrangements that could otherwise have left them facing large, unexpected tax bills.
PAYadvice.UK 31/10/2024