New HMRC Guidance on Umbrella Companies

Guidance from the Revenue needs to be more explicit, says regulatory body

HMRC issued new official guidance on umbrella companies who draw contractors in with offers of reduced tax liability and increased take home pay.

However, the Freelancer and Contractor Services Association (FCSA), the UK’s biggest regulatory body of umbrella companies, says the paper does not go far enough to make clear what a compliant umbrella company actually looks like.

While the FCSA broadly welcomed the new guidance, known as “Spotlight 45”, the organisation raised concerns that it doesn’t do enough to differentiate between true umbrellas, operating compliantly, and disguised remuneration arrangements, including contractor loan schemes.

Head of the FCSA Julia Kermode said: “The latest HMRC spotlight 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 suggest 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. 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.”

She added: “Whilst 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. There are many compliant umbrella employers operating who provide a valued service with many benefits to the contractor, agencies, and end-clients. We are sick and tired of our sector always being tarnished with the same brush due to the actions of non-compliant firms that do not provide professional employment services and are simply promoting dubious schemes. 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.”

So just what does a compliant umbrella look like? HMRC’s Spotlight 45 goes to lengths to explain how disguised remuneration schemes work, with a checklist of how to identify such arrangements.

That’s all well and good, but where the guidance falls down is in failing to help contractors identify umbrella companies who are actually doing things properly; operating within the tax rules and treating workers fairly.

HMRC’s “red flag” umbrella checklist:

HMRC warns that you should should check the below to see if you may be engaged by a disguised remuneration scheme:

  • The company promises that you can keep 80%, 90% or 95% of your wages and be tax compliant.
  • Only a fraction of your salary is paid through payroll and subject to PAYE (indicating that you are only paying tax on some of your income).
  • You are paid using a loan, credit or investment payment and the company claims this isn’t subject to income tax or National Insurance contributions (this is tax avoidance).
  • The payment from your umbrella company is routed through various companies before it comes to you.

A ‘green flag’ checklist:

The following are indicators that your umbrella company is complaint and legit and not likely to land you in hot water with the taxman:

  • The company is UK based and has no off-shore affiliations and you are paid directly by that company.
  • You are employed by the umbrella company and have an employment contract.
  • All wages are paid through payroll and have PAYE tax and NIC applied.
  • The company pays at least National Minimum Wage and only reimburses expenses above this.
  • The company pays statutory payments such as sick pay, where there is entitlement.
  • The company pays holiday pay – this might be rolled up in your wages or held back and paid out when you take time off.

The golden rule

The golden rule is if something looks and sounds too good to be true, it probably is. Liquid Friday’s Joe Taffurelli has the following advice for contractors, or indeed recruitment agencies, when it comes to choosing the umbrella companies they engage with: “Whilst the advice from HMRC goes some way it does not go far enough. Highlighting unscrupulous providers is a good start but it should not tarnish providers who are doing the right thing. FCSA members go above and beyond to ensure compliance within the market, however, HMRC must be faster and target those who are not complying. If anyone is concerned that they may be affected by a non-compliant model do not hesitate to contact us to discuss.”

• Thanks to Liquid Friday for this article – see


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