The HMRC published an official guidance yesterday on engaging with umbrella companies in the UK.

The guidance provides advice and spotlights umbrella companies that effectively operate tax avoidance schemes.

“Most employment agencies and umbrella companies operate within the tax rules. However, some umbrella companies and agencies promote arrangements that claim to be a ‘legitimate’ or a ‘tax efficient’ way of keeping more of your income by reducing your tax liability,’ the guidance states.

The guidance also breaks down how arrangements work, how payments are made, the risks of using such arrangements, what should be checked and what to do if involved in a tax avoidance scheme.

Julia Kermode, chief executive of Freelancer & Contractor Services Association, commented on the guidance, “The latest HMRC spotlight just out is very welcome and provides some sound advice.  HMRC rightly explains that any "umbrella" firm offering contractors a high percentage net take home pay, HMRC suggests 80% or more, is unlikely to be compliant. However, the guidance doesn't go far enough; these types of arrangements are not true umbrellas firms but disguised remuneration schemes.”

“A true umbrella is an employer of contractors, providing them with all the benefits of permanent employment, along with all the benefits and flexibility of working as a contractor,” Kermode continued. “It is also true that an umbrella employer will process 100% of gross pay through RTI payroll, meaning that contractors are not at risk of a high tax bill at a later date.  They work in exactly the same way as any other employer.”

“While it is good to see HMRC issuing a steer on umbrellas we are concerned that it could serve to put people off working with umbrellas entirely,” Kermode said. “There are many compliant umbrella employers operating who provide a valued service with many benefits to the contractor, agencies, and end-clients.”

“We warned HMRC that we would see a proliferation of tax avoidance schemes as a direct result of the 2017 Off-Payroll reforms and our prediction has become a reality. Recruiters must ensure that their supply chain is not facilitating tax avoidance otherwise they risk a corporate criminal offence under the Criminal Finances Act, so choosing compliant umbrella employers for their PSLs has never been more important,” Kermode said.

Umbrella companies recently came into the spotlight when trade union Unite said British construction firm Balfour Beatty would ban the use of umbrella companies on a major highways contract in the North West of England. However, this was found to be a misunderstanding as Balfour Beatty denied banning the use of umbrella companies and said that its modern slavery policy has been misinterpreted and was not aimed at the use of umbrella companies.