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Umbrella Companies cause HMRC to flex its muscles

freelancesupermarket.com newsroom

RSS 10 August 2009
HMRC have raised concerns about the operation of certain Umbrella Companies, utilised by contractors and freelancers in the UK.

In Revenue & Customs Brief 50/09 released last week, HMRC suggest that there has been a significant growth in Umbrella Companies over the last two years. These companies are marketed as providing a tax and national insurance saving to those that use them, primarily freelance contractors.

However in a warning to the umbrella industry, HMRC have stated that in their view many temporary workers are gaining tax relief on travel and subsistence expenses which they wouldn't be entitled to if they were not working through an Umbrella Company.

In order to gain this advantage, Umbrella Companies usually create an overarching employment contract and rely for their effectiveness on the fact they have been issued a dispensation in accordance with section 65 Income Tax (Earnings and Pensions) Act 2003.

There has been a keen focus on Umbrella Companies since an HMRC review into their operations and a subsequent consultation document last year. Bob Jones, a former HM Inspector of Taxes has an in-depth knowledge of the PAYE expenses system and the rules governing temporary workplaces in the UK.

"I was convinced that HMRC were going to introduce legislation to make umbrellas, at best, a less viable alternative. My response to HMRC was that some of the problems with umbrellas were of HMRC's own making because of, amongst other things, a lack of staff awareness and failure to use existing powers."

Following the consultation, HMRC decided to use their existing powers to police Umbrella Companies and have undertaken compliance activity since July 2008. This has highlighted a number of concerns in some Umbrella Companies, including:

  • Potentially ineffective overarching employment contracts
  • Dispensations which are invalid, or which have been wrongly applied
  • Not complying with the terms of the dispensation
  • "Expense payments" made tax-free without that level of expense, or in many cases any expense, having been incurred
  • Potential illegal deductions from workers' pay
  • Ineffective and sometimes unlawful management processes
  • Breaches of national minimum wage
  • Workers being made to opt out of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 without fully understanding the implications of what the opt-out means

The warning from HMRC does not merely end with Umbrella Companies. In the brief HMRC indicate that an end user business or client "run a risk of damage to their reputation and their business if HMRC takes action."

Bob Jones has also warned that the effects are not just felt by the worker or the end client, but also other Umbrella Companies that operate within the law. "Those responsible umbrellas who comply with all their legal obligations simply cannot compete with those who do not."

Looking towards the future, the brief ended by stating that HMRC will continue to investigate and discover the extent of the abuses, and if necessary will consider if current measures are able to address the effects of the Umbrella Company scheme. If not, further measures will be required.

According to Bob Jones, the "further measures" could result in non-compliant umbrellas being "expected to make good all tax, National Insurance Contributions together with interest plus all conceivable penalties that HMRC can charge".

With the very clear focus from HMRC, it has never been more important to choose an Umbrella Company with a good reputation, robust expenses policy that one that operates like a true employer. It is also important to note that the latest HMRC review will be fousing on non-compliant companies only. If you are on the hunt for a new Umbrella, we therefore strongly recommend that you take a look at our UK Top 10, all of which operate to the highest levels of compliance.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.
Image: Weightlifting by 713 Avenue

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