Umbrella schemes which claim to be ‘compliant’… and why they’re not

If you type ‘umbrella company’ into Google and check out the paid ads, probably the most common word used is ‘compliant’ e.g. ‘100% HMRC compliant’. This sort of statement is often made in conjunction with the promise of high take-home pay e.g. ‘Up to 90% after tax, 100% compliant.’

So, can an umbrella company be compliant and yet still provide its clients with 80-90% net take-home pay? The simple answer is no and these are the reasons why.

  • A true umbrella company will operate PAYE (Pay-As-Your-Earn); the starting rate of income tax is 20% so, immediately, quotes of 90% take home seem a bit unlikely. Add in the fee that the provider will take and National Insurance contributions and you don’t need to be Carole Vorderman to realise that things just don’t add up.
  • Some umbrella companies claim that they are able to generate high take-home pay as their scheme involves you being registered as a sole trader. Nothing wrong with that, perfectly legal. Until you read this: False Self-Employment. If you work through an agency and you are subject to supervision, direction and control or there is a right to subject you to such, then you must be paid as an employee and not a sole trader.
  • Everyone knows that there are tax havens, the gnomes of Zurich are world-famous, so what’s wrong with putting your money with an offshore umbrella company? If your contract was secured through a recruitment agency, read this: Offshore Intermediaries Legislation.
  • Some umbrella companies will defend their ‘scheme’ by saying that it is backed by a leading tax QC or something similar and that they will defend their position in Court with no risk to you. We couldn’t agree the ‘no risk’ bit but the rest (up until recently) was true. Now HMRC have the power to make you pay your taxes upfront if the scheme that you are using is similar to one that they have already defeated: Read Follower Notices
  • Loan schemes have always been very popular in the contractor market place or they were until the introduction of the Disguised Remuneration Legislation

If you are truly determined to try and reduce your tax bill, you could comfort yourself with the thought that, at the end of the day, if the scheme doesn’t work, you’ll only have to pay out what you would have paid out anyway. That was until the prospect of Retrospective Taxation became a reality a few years ago (via ‘BN66’), and is likely to become more widely applied in the future.

This article was kindly provided by Lisa Keeble, Managing Director of ContractorUmbrella Ltd, one of the UK’s most respected umbrella companies and founder member of AllUmbrellaCompaniesAreEqual.

Last updated: 6th July 2019