With HMRC’s changes to IR35 Legislation in the Public Sector coming into force next month, many who are caught by this are moving from their own Limited Company to an Umbrella Company. Umbrella Companies handle their PAYE & NI deductions and remove the administration of contracting.
With this comes the resurgence of companies calling themselves an umbrella company but in reality being anything but. Any genuine Umbrella Company operates full PAYE on your income and in some circumstances, allows business expenses for tax relief.
A Google search will turn up multiple claims from ‘Umbrella Companies’ of take home pay in the region of 80-95%. This sounds fantastic at first glance, but unfortunately what sounds too good to be true usually is just that.
Firstly, PAYE can never provide a blanket take home percentage. Many proudly display that they are “HMRC Approved” or “HMRC Registered”. To debug this myth, HMRC will never endorse any payroll scheme. Any HMRC registration number will most likely be a DOTAS (Disclosure of Tax Avoidance Scheme) registration. This means the scheme will be registered with HMRC and be awaiting investigation. This of course makes it far easier for HMRC to track and target users of these schemes when they do investigate.
Hallmarks of such models are a low salary - between £8,000-£12,000 per year – with the remainder paid as a “loan” from a company or trust. In reality the loan is never repaid and is no different from taxable income. With minimal tax being paid on the salary (maybe £10 per week) and nothing on the loans, this means that on an 85% retention, the 15% left is the operator’s fee. This equates to over £1,000 per month for someone on £350 per day!
HMRC regularly challenge these schemes and have a win rate at around 80%. They will aggressively pursue any workers using such schemes and punishments are not just for unpaid tax but interest & fines as well. They may also contact mortgage providers & push for criminal convictions. Information from HMRC on this can be found here.
In a single year of using one of these schemes, a contractor on a £350 per day rate could potentially be looking at a bill of around £40,000 – that’s before any fines or interest are applied. Combine this with the high cost of legal representation and any knock on effects, as such we would strongly advise anyone considering such a scheme to think very carefully before committing.
Most UK recruitment businesses will not engage with a provider who has neither undergone rigorous compliance checks or can confirm that all income is subject to UK PAYE and NIC. Promoters of such schemes are also likely to be caught up in the liability chain from April which places further risk on recruitment businesses who, however passively, engage with such models.
PAYE Umbrella companies offer genuine employment, including the benefits of being an employee like Sick and Holiday Pay and management of your ongoing contracts. You are also safe in the knowledge that your tax affairs are handled accurately and efficiently, so HMRC will not come knocking one day in the future.
For further information please feel free to contact NASA on (0117) 929 7683.