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We’re concerned that we’re seeing increasing examples of a particular type of tax avoidance scam recently. In this fraudulent activity umbrella companies entice contractors to sign up with them with the undertaking that their offerings are compliant, then change what the contractors have been promised without their knowledge, leaving them compromised and at risk of investigation by HMRC. We look into this dubious practice and show you how to avoid it.

Tax Liabilities

The practice focuses on Tax Liabilities – the sums of money that contractors are legally obliged to pay to HMRC as their contribution towards the safe and effective running of our country, the same as any other employee.

In the scam, a non-compliant umbrella company approaches a recruitment agency offering them products and services which, at first glance, seem to be legitimate – they pass the agency’s due diligence tests and are added to their Preferred Supplier Lists (PSLs). Then the recruitment agents refer contractors to them with the expectation that all is above board and that the full amount of tax liabilities will be deducted from the contractor’s payslip as required by law.

However, after 12 weeks the contractors are approached by the umbrella company with the offer of a new model which promises to ‘optimise’ their earnings, claims to have been ‘approved by HMRC’, and which offers them higher levels of take-home pay. If contractors are struggling with the cost-of-living-crisis that affects so many of us today, they may well be tempted by the idea of retaining more of their hard-earned cash. But what they might not realise is that this is a tax-avoidance scheme and is illegal.

Penalties

The practice can impact on both contractors and recruitment agencies;

Recruiters run the risk of being subject to tax compliance checks, financial penalties and tax liabilities. The financial penalties can be 100% of the fees they have received after legal action which labels them as an ‘enabler’ of tax avoidance. There is also the possibility that their recruitment agency will be ‘named and shamed’ leading to reputational and professional damage. These penalties will stand even if they were not aware that an umbrella company has changed its practices and lured contractors into a non-compliant scheme. 

Contractors are ultimately responsible for paying the correct amount of Income Tax and National Insurance contributions, even if they are not aware that they are employed by a non-compliant umbrella company, and even if they have been referred to that umbrella by a recruitment agency. It’s something that requires constant vigilance, and contractors are recommended to use HMRC’s Tax Calculator on a regular basis to see if the amounts they’re currently paying reconcile with what they ought to pay.

Compliance

New, ‘improved’ offerings by umbrella companies that have recently started to operate should be viewed with the utmost of suspicion. The safest and most effective way of maintaining compliance with all the legal tax requirements of being a contractor is to register with an umbrella that has a steadfast and reliable reputation.

In our case our commitment to compliance is evident by several factors. Firstly, we’re members of the Freelancer and Contractor Services Association (FCSA) and have undergone its rigorous and exacting selection procedure, demonstrating that we adhere to its strict Codes of Compliance.

Secondly, we have a long and prestigious history of providing compliant umbrella and payroll services. Payme was established in 2011, and has helped thousands of contractors and hundreds of recruitment agencies over the last 12 years – effectively demonstrating that we’re not a ‘fly-by-night’ operation. 

Thirdly, it’s a matter of professional pride that we adhere to all the relevant legislation to provide the most tax-efficient umbrella services possible, within HMRC guidelines, and we frequently update our policies and procedures in line with new guidance and changes to the law.  

Scammers exist in all walks of life, and when there’s large sums of money involved the risks to hard-working contractors and recruitment agents are magnified. The safest way for both contractors and recruitment agents to stay compliant and secure in the knowledge that they won’t be receiving a letter from HMRC is to give us a call today on 0333 200 0845, email us at info@payme.co.uk or fill in the contact form here.