The HMRC said in an announcement this week that it is aware of some umbrella companies who use employment and recruitment agencies to promote their tax avoidance schemes.

It warned that while employment and recruitment agencies might believe they are agreeing to one set of arrangements, it could be a tax avoidance scheme that the umbrella is promoting.

The HMRC warned that these schemes are targeted at individuals such as contractors and other temporary workers, who may not know the risks of using them.

It advised that employment and recruitment agencies should:

• check very carefully the details they are given by umbrella companies about their products
• consider taking independent professional advice if they are unsure if an umbrella company they plan to use is compliant

“Most of these schemes do not work and are successfully challenged by HMRC in the courts and tribunals. Agencies need to avoid recommending such schemes. They must also carry out due diligence to make sure they are not using non-compliant umbrella companies,” the HMRC stated.

Under new powers introduced in 2022, HMRC can publish information about enablers when they suspect they are involved in: promoting a tax avoidance scheme and having a role in making a scheme available to use.

Last year the government recently consulted on options to tackle non-compliance in the umbrella company market, including:

• penalties for agencies failing to carry out mandatory due diligence
• additional circumstances in which agencies could be liable to pay tax liabilities

Earlier this month, the government said it is looking into a statutory due diligence scheme for umbrella company use with the aim of tackling non-compliance in the industry. 

The HMRC outlined potential risks including for firms that take part in non-compliant supply chains. These include supply chains involving umbrella companies operating tax avoidance schemes. These risks include damaging their reputation, affecting their ability to secure and maintain contracts, and affecting their business relationships with workers and end clients.

Crawford Temple, CEO of Professional Passport, a UK independent assessor of payment intermediary compliance said, “The latest advice from the government is welcome.  Decisive action by them would be even better to stamp out tax avoidance in our industry but sadly that was not what we got on Tax Administration and Maintenance Day.  Therefore, it is imperative that recruiters should continue to always check out the compliance accreditations of any potential partner.”