Contractors often choose to use an umbrella company rather than set up their own limited company. The option enables them to combine the benefits of having an employer with the freedom of working as a contractor. However, umbrella companies have come under fire from HMRC over claims that a significant number fail to comply with their tax obligations. As a result, it launches an umbrella company HMRC investigation into any company it suspects of having committed tax fraud. If you are involved with an umbrella company tax investigation, our HMRC solicitors and barristers are ideally placed to assist.
For a confidential free discussion, call us today on 01908 414990, alternatively email us at Hello@altion-law.co.uk or complete our Free Enquiry Form and we will call you back.
What is an Umbrella Company?
An umbrella company is a company that acts as a third-party employer for workers, such as builders and IT professionals, who elect to conduct their business as contractors. The contractor remains at liberty to choose the work they take on, and the umbrella company takes care of the administrative tasks on their behalf, such as tax returns.
The contractor is essentially employed by the umbrella company. When the contractor takes on a project, the umbrella company steps in to invoice the client and collect payment. It then pays the contractor an income. That income will be the invoiced amount after the umbrella company deducts expenses such as tax, national insurance, and its own fees.
Why do Contractors use Umbrella Companies?
To ensure companies don’t fall foul of their own tax obligations, many insist that individuals who undertake projects for them as contractors are limited companies. Using the services of an umbrella company can be more convenient for the contractor than incorporating their own company.
Umbrella companies offer several other advantages, including the following:
- The umbrella company handles all the contractor’s tax obligations, including submitting their tax returns.
- Since the contractor is employed by the umbrella company, they enjoy the benefits of an employee, like holiday pay and sick pay.
- Some umbrella companies offer enhanced benefits packages, such as private health insurance.
- As an employee, the contractor may find it easier to secure finance, such as loans and a mortgage.
What are the downsides of using Umbrella Companies?
Using umbrella companies does have several notable disadvantages. Obviously, their services don’t come for free, so the contractor must pay the company’s fees. Further, and crucially, umbrella companies have an unfortunate reputation for facilitating tax avoidance and tax evasion schemes. HMRC has reported that, in 2022-2023, umbrella companies were largely responsible for the £500 million that was lost by the Revenue to specific types of tax avoidance schemes. As a result, HMRC is cracking down on umbrella companies and proactively pursuing umbrella company HMRC investigations.
What is an Umbrella Company HMRC Investigation?
Any time HMRC suspects tax avoidance or evasion, it can choose to look into the taxpayer’s financial circumstances more closely. However, an umbrella company HMRC investigation might not only affect the umbrella company itself. It may also affect any other businesses caught up in the non-compliant supply chain.
If you use the services of an umbrella company that is committing tax fraud, you risk being inadvertently drawn into tax avoidance or evasion, the consequences of which can include the following:
- Being associated with tax evasion or avoidance can significantly harm your reputation.
- Being associated with tax evasion or avoidance can impact your ability to win and maintain contracts.
- Being associated with tax evasion or avoidance can damage your reputation with your workers, suppliers, and customers.
- HMRC may demand that you pay any tax you owe, potentially with interest and penalties on top.
How can you avoid an Umbrella Company HMRC Tax Investigation?
You can significantly reduce your risk of facing an umbrella company HMRC tax investigation by being aware of the issue and taking steps to verify that the company you propose using is legitimate.
Examples of factors that should set alarm bells ringing include the following:
- The umbrella company operates offshore or offers financial incentives.
- The umbrella company claims that you’ll keep over 80% of your income and be tax compliant.
- The umbrella company does not pay you directly from its bank account but passes your money through other accounts first.
Examples of measures you can take to reduce the risk of using the services of a non-compliant umbrella company include the following:
- Carry out due diligence on everyone in your supply chain.
- HMRC publishes a list of those involved in tax avoidance schemes; you should confirm that the umbrella company does not appear on it.
- Check the details Companies House holds for the umbrella company to confirm they tally with what you have been told.
If you have been contacted by HMRC about an umbrella company HMRC investigation or have any concerns at all about the issue, please contact our HMRC and border force solicitors. With decades of experience assisting clients with all HMRC-related matters, we offer exceptional legal advice coupled with a unique insight into the workings of HMRC. Our advice is concise, straightforward, and focused on achieving your business goals as swiftly and cost-efficiently as possible.
For a confidential free discussion, call us today on 01908 414990, alternatively email us at Hello@altion-law.co.uk or complete our Free Enquiry Form and we will call you back.
