Tech contractor who uses an umbrella company? UK tax is coming after them Britain's tax collection agency is clamping down on umbrella companies used by contractors to pay their dues, with 10,000 outstanding tribunal cases waiting to be heard. This is according to legal eagles at Pinsent Mason, which says the number of specific instances shot up sevenfold in the 12 months from the 1,200 registered …
The mess HMRC and Treasury has created is unbelievable, all to give corporations like Infosys a competitive advantage.
Unfortunately there seems to be no organisation powerful enough to go after the corruption in those institutions.
It is especially interesting that HMRC seems to be always going after a contractor and not after the umbrella. Wonder why?
Umbrella companies are dire.
Used one once - on first contract (naively thought it might be a good idea, umbrella co contacted me with offer of a role) never again, they provided very little, lots of paperwork, and creamed off a huge amount of cash (got on well with boss I was working for at place I contracted via umbrella, & was told how much they were paying umbrella company - well over double what I was receiving!)
"I was working for at place I contracted via umbrella, & was told how much they were paying umbrella company - well over double what I was receiving!)"
Contractor based for a time at a Pharmaceutical in Stevenage, in my early days working there via a agency, via a MSP (which changed hands about 3 weeks in) to the Pharmaceutical someones wires got badly crossed & I was suddenly being asked to approve the invoices from the MSP.
I noted that it was about 47% above my rate plus VAT, so when agency contacts cry that they (Personally) are not making any money off of me when they match rates to what colleagues (Different agency & less responsibilities) were receiving I tend to turn around & say I'm pretty sure you are as I've been in this game a long time.
"all to give corporations like Infosys a competitive advantage"
Surely not. There can't be any big consulting companies with access to Treasury Executives, Ministers, Chancellors or even Prime Ministers who could possibly influence how HMRC created rules that favour the big international corporations over British workers.
It is especially interesting that HMRC seems to be always going after a contractor and not after the umbrella. Wonder why?
That's not what the article says. The very first line is "Britain's tax collection agency is clamping down on umbrella companies", and it goes on: "With a large number of umbrella companies suspected of VAT avoidance" and "Umbrella companies are firmly in its crosshairs". There's no suggestion that this is targeting contractors, quite the reverse.
With the complexity of IR35, lots of contractors are choosing to use umbrella companies to simplify their situation. The article would suggest that there has been a growth in unscrupulous umbrella companies attempting to cash in on this, but not properly managing their own tax affairs, in particular not paying the VAT they should. That's what HMRC is targeting, it shouldn't have any effect on the employees of those companies.
What they say is one thing and what they do is another.
With the complexity of IR35, lots of contractors are choosing to use umbrella companies to simplify their situation.
I am afraid contractors have no choice but to use umbrella companies, often mandated by the "client" from their "preferred supplier list", because clients are afraid of HMRC and taking the risk averse stance they declare all their contracts "in-scope".
This thing is also nothing new. This has been going on for years (look into Loan Charge scandal for instance, that involve umbrella companies) and from time to time HMRC is issuing a warning that this time they are going to do something about it. Meanwhile umbrellas, agencies and other entities inserted between the client and the contractor, like leeches are getting wealthier and wealthier at the expense of the workers.
Oh yeah. Brainfart. Somehow my brain parsed it wrongly, and refused to see the actual letters. Happens all the time at work. Don't tell the boss.
I even went as far as to put the exact same thing at the end, but in my misplaced pedantry failed to spot the 2nd ^ in the initial example.
I think because I just read "His" at the end, and disregarded the ^.
Am I overanalyzing this much, or what?
Wait a minute? Are you all saying The Queen Is Dead!? When did that happen?
If this is an issue about VAT, then it's nothing to do with IR35.
There is no reason for an umbrella company not to be registered for VAT. You charge the VAT on top of your invoice to the client, the client pays it to you and claims it back from HMRC, you pay it to HMRC, and everything is square.
Are they saying that some of these companies are being run as carousel schemes, i.e. the VAT is being charged but not paid to HMRC? Then that's fraud - but it's not limited to umbrella companies.
There is no reason for an umbrella company not to be registered for VAT. You charge the VAT on top of your invoice to the client, the client pays it to you and claims it back from HMRC, you pay it to HMRC, and everything is square.
That's how it works when in scope of IR35 and still working through "PSC". The Fee Payer is invoicing the client on contractor behalf (rate + VAT), then once they receive the payment, they deduct PAYE taxes and then send money to PSC including all the VAT. Then contractor has to do the VAT return and pay whatever they have to pay.
If someone works through an umbrella, then they are no longer a contractor (or should I say they are contractors in name only) but an employee of an umbrella and VAT is not their concern. If HMRC is somehow trying chase employees for the company unpaid VAT to cover up their ineptitude, that's crazy.
Then why just limit that to umbrellas and not go after any worker when their employer doesn't pay VAT? Wow.
I'm not going to bother looking it up, but i'd bet good money that HMRC are chasing the company director; which is probably also the sole employee.
Your VAT exempt up until a certain point (~£70k IIRC) after which you've got to pay VAT.
So if hypothetically somebody earning £100k has made themselves into a company to avoid the 50% tax rate and is only paying ~£2 a week class whatever NI contributions then HMRC have realised that they can go after them for 20% VAT and is probably doing so with considerable enthusiasm to fill in the gaping hole in the public coffers, a situation not improved by the rich deciding to opt out of paying tax.
"I'm not going to bother looking it up"
Probably should have..
If a contractor is working through an umbrella they are an employee and DO NOT PAY VAT matter what their income.
If a contra Tor is outside ir35 then your right, they have to pay VAT if/when over the threshold but if they're outside IR35 they're not working through an umbrella.
If a contractor is working through an umbrella they are an employee and DO NOT PAY VAT matter what their income.
Correct. However, as I suspect you well know many people have their own personal umbrella companies so they don't pay any taxes beyond the class whatever NI contributions which is something like £2 a week. If they are the director of their own little company and their income has exceeded the VAT threshold then they are required to pay 20% VAT to HMRC.
My guess is that HMRC have realised that a subset of umbrella companies registered with a sole employee are over the VAT threshold and therefore can be done for a failure to pay VAT, and the person being taken to court is the company director who's also the sole employee. That's what i'm not going to bother to look up; because I doubt the information is going to be available because HMRC can't say that, the tax evasion company that set it up won't want to advertise their incompetence lest it put off other customers, and the people dodging tax aren't going to want to advertise what they are doing.
"I suspect you well know many people have their own personal umbrella companies"
I know its been months but I just saw that you replied.
I think you are misunderstanding what an Umbrella company is Vs a Limited company that a contractor would use.
Umbrella Company = Third party that sits between the contractor and the client - Contractor goes on the payroll and is paid as an employee including all NI/Income Tax etc, contractor has little control over their remuneration, EVERYTHING gets paid as a wage through PAYE.
Limited company - Owned by the contractor, contractor pays Corp Tax & VAT, contractor can remunerate themselves with Wages and dividends and has options to defer personal tax by leaving money in the company accounts.
Not all VAT can be reclaimed by the company paying the fees; banks in particular can only claim a small portion as their income is VAT exempt (distinct from zero-rated). Banks in particular are generally hit with this as most of their products are rated exempt.
If a company isn't VAT registered, they can't claim back the VAT paid either.
In either case, not charging VAT is a loss to the treasury.
-> Britain's tax collection agency is clamping down on umbrella companies used by contractors to pay their dues
Meanwhile, "perfectly legally" the very rich have offshore trusts where they shovel money, avoiding tax like the plague. People like Michelle Mone, a peer of the realm and studious avoider of tax.
Why does the tax man not go after them? Oh, it's all legal for the very rich to avoid paying tax. But if you are small fry, nail 'em up centurion.
@VoiceOfTruth
"Why does the tax man not go after them? Oh, it's all legal for the very rich to avoid paying tax. But if you are small fry, nail 'em up centurion."
Very true. When they say they will tax the rich more we should realise they cant. Their ability to do so is very limited and the rich can move themselves and their money away from the grubby tax collector. It is the rest of us who get squeezed and increasingly so.
"When they say they will tax the rich more we should realise they cant. Their ability to do so is very limited and the rich can move themselves and their money away from the grubby tax collector. "
That's a myth, repeated ad nauseam to keep the plebs from asking that the rich pay their fair share:
https://www.theguardian.com/inequality/2017/nov/20/if-you-tax-the-rich-they-wont-leave-us-data-contradicts-millionaires-threats
https://www.sup.org/books/title/?id=27987
https://www.nytimes.com/2013/02/16/business/high-taxes-are-not-a-prime-reason-for-relocation-studies-say.html
It's because people (like you) actually believe the myth that taxes for rich people must remain low, else they will just move somewhere else and take their moneys with them, why the bottom 99% has to shoulder an ever increasing financial burden.
@Dan 55
"So in the UK, making the rich pay their fair share wouldn't work?"
I am amazed people still talk about 'fair share'. It is one of the worst disguises for green eyes and wanting others to pay for others stuff.
"If that's really the case I guess it's because HMRC don't appear to have any experience in doing that."
Or that its a bad idea to keep stealing ever increasing amounts and calling it 'fair'
In the country where Amazon could avoid tax for another two years, Starbucks pays just £5m UK corporation tax on £95m gross profit, and Meta paying less tax on higher profits yet half a million vulnerable households have not received help with energy bills, feel free to use the emotive word "stealing" when people say that the rich should be paying more tax. It really does convince people that your argument is based in facts and reality.
The "mistake" there is also when people think of taxing the rich as in taxing the rich individuals. They are often remunerated in completely different ways than mere mortals. That is if you say for instance, let's get 50% tax rate for those over £150k! That will tax the rich!
In reality, that will tax highly skilled individuals whose probably only contact with the rich is walking past the board member if they decided to bestow the office with their presence.
Money is in corporations, trust funds, "charities", foundations and parked in properties. And no - it's not enough to increase corporation tax like Sunak has suggested or place 2% digital tax. These measures only affect the small and medium business that is already struggling.
HMRC has to get their lazy bones together and dive into the books of giants. All laws and instruments are already there, so there is no excuse.
@Dan 55
"In the country where"
The companies you mention legally pay tax. Do you think we should illegally steal more? And worse do you think we should legally steal more? Tax is so high that Amazon is replacing workers with robots. Even the article for starbucks tells you you are wrong, after paying costs of £78m its taxable profit was only £13.3m.
"half a million vulnerable households have not received help with energy bills"
There is no help, its a colossal failure of the last couple of decades at least. The genius is to tax the windfall profits of energy companies causing less investment in more energy. To give that money to people so they will use more energy that we dont have. This wasnt chucking a little money at the poor but a massive kick out of money. If we want help with the energy bills we ditch the green madness subsidies, get those coal plants running at full output and get fracking.
"feel free to use the emotive word "stealing""
Taking something from someone by threat/use of force. Is that not stealing? You are the one using emotive words like 'fair', a completely numberless and worthless unquantifiable value.
How can you have identified all the problems then determine the solution is to carry on digging?
The solution is not to "illegally steal more" (whatever this means), but to ensure that the net tax reduction gained by setting up a subsidiary in the UK and paying another entity controlled by themselves with the price set by themselves for the rights to trade as themselves is zero.
Tax is so high that Amazon earns billions in profit and Bezos is the second-richest man on the planet. Amazon is so downtrodden by tax that analysts everywhere are recommending for 2023. Amazon can replace workers with robots and re-organise their warehouses so that the robots actually work as well as people if they so wish, but that should have no bearing on the tax they pay.
There are people who see IT just as a cost centre, and most commentards here know this is wrong. There are also those who see tax as a burden, but it's the price of civilization.
Now, on to energy:
To give that money to people so they will use more energy that we dont have.
So near yet so far, always failing at the last hurdle. Why don't we have energy? Centrica closed down storage, hoping to be the middleman because the lack of storage meant that they could do nothing else but than sell on excess gas to neighbouring countries and buy it in from neighbouring countries and take their cut.
It's now reopened and the UK can store a whole nine day's gas, up from three. Meanwhile other countries which invested in gas storage are in a much better position now to last the winter. They invested in storage, the UK closed it down.
We didn't invest in non-fossil fuels because that reduced shareholder profits. We just kept on as we were, and have come unstuck now. We're still not investing enough. 33% of UK energy is non-renewable and that figure must fall, not rise. Energy providers now threaten to pull UK investment over windfall tax, but this hasn't happened elsewhere in Europe and they weren't investing in the UK anyway.
So we are in a position where energy providers haven't invested or planned for the future and are just enjoying record profits brought about by scarcity. Your solution - that providers continue doing what they're doing and let them search for more fossil fuels or frack is just an evolutionary dead end. If providers don't do what they must then a windfall tax on excess profits (note: not profits) to reduce bills or invest in non-fossil fuel generation is perfectly reasonable.
@Dan 55
"How can you have identified all the problems then determine the solution is to carry on digging?"
That makes sense if the problem is a lack of digging.
"but to ensure that the net tax reduction gained by setting up a subsidiary in the UK and paying another entity controlled by themselves with the price set by themselves for the rights to trade as themselves is zero."
You do know that would mean we would lose tax money for the same reason? So companies here that make money abroad through their subsidiaries would end up being taxed in retaliation?
"Tax is so high that Amazon earns billions in profit and Bezos is the second-richest man on the planet."
Very successful company considering it started in a garage. Very impressive and has saved people billions due to the competition it created. The guy earned it.
"Amazon can replace workers with robots and re-organise their warehouses so that the robots actually work as well as people if they so wish, but that should have no bearing on the tax they pay."
It will make a difference to the tax they pay. For every employee the company pays tax just to employ a worker. So fewer workers and more equipment that needs parts which I am sure will be cleverly accounted for.
"There are also those who see tax as a burden, but it's the price of civilization."
And the price of tax is a failing economy and collapsing civilization. Because it is a burden and so needs to be kept from ballooning too far.
"Why don't we have energy? Centrica closed down storage"
Why would anyone invest in storage requiring decades to pay back when government policy is an end to fossil fuel?
"We didn't invest in non-fossil fuels because that reduced shareholder profits"
We have invested in green madness for a couple of decades in place of actual power generation. And here we are.
"33% of UK energy is non-renewable and that figure must fall, not rise"
Just to keep the lights on last year and this year we are keeping the coal plants burning.
"So we are in a position where energy providers haven't invested or planned for the future"
They invested loads into green madness because thats the direction the government incentivized.
"If providers don't do what they must then a windfall tax on excess profits (note: not profits) to reduce bills or invest in non-fossil fuel generation is perfectly reasonable."
Ok so there is more money given out. But where is the energy to buy? The problem isnt the availability of money but the lack of energy available.
why the bottom 99% has to shoulder an ever increasing financial burden.
Rubbish. The top 1% pay more than a third of all income tax paid in the UK, averaging a 42% tax rate. Almost half the lower-earning population pay no income tax at all.
Here's an excellent video on taxaton and who pays what. (Le Monde published this as backround for the recent French elections. So although it's about the French system it's a good primer for those who don't really understand tax burdens. Youtube auto-translate subtitling does a good job for those who don't undstand French.) Enjoy:
https://www.youtube.com/watch?v=FTqUpolCvpk&ab_channel=LeMonde
Oh, it's all legal for the very rich to avoid paying tax. But if you are small fry, nail 'em up centurion.
It's more a question of scale. If it will cost you 50k to pay a tax lawyer to minimize your tax (legally), there's not much point in trying if you only have 25k of tax to pay anyway. 2.5M tax to pay, that's another situation altogether.
I'm Inside 35. The contracting agency (API cat?) forces me to use an umbrella company, absolving them from any employment fees or obligations. I end up paying employer's NI, apprenticeship levy (intended for companies with more than £3milion pay bill), and employer's pension contribution, on top of income tax and the employee pension contribution. The umbrella fee itself is small. The objectionable part is paying the employer's costs - the agency are operating a scam in plain sight, which HMRC turns a blind eye to. They're chasing the wrong people.
"The objectionable part is paying the employer's costs"
And if you were outside IR35 you would be the director of a Limited Company and, wait for it, you would still have to pay all the Employer portions of the employment as well as your Insurance and probably an accountant, along with all the Pension contributions.
Limited Company does give Directors some flexibility in how they structure their employment and tax status (e.g. paying via dividends is more tax efficient than PAYE), but it is still the same rules that apply to everyone, and one way or another HMRC will get the money the country is owed.
"And if you were outside IR35 you would be the director of a Limited Company and, wait for it, you would still have to pay all the Employer portions of the employment as well as your Insurance and probably an accountant, along with all the Pension contributions."
You mean that the limited company, not the director/employee, would be paying the employer portions, plus accountancy fees, and those would be costs, like also the director's/employee's salary, that would come out of company income before profits and therefore before corporation tax and any dividends.
> The objectionable part is paying the employer's costs
I think you mean the unlawful part is an employee paying the employer's NI - an employer cannot legally pass on/deduct those contributions to an employee.
However what may be confusing things for you is the use of the terms "gross pay" and "assignment rate". Gross pay is what you, as an employee of the umbrella agency, are paid, "assignment rate" is what they charge the agency/client which is the gross pay + the likes of employer's NI, etc added on. The "assignment rate" is not really relevant to you.
When you discuss the contract with the umbrella/agency they should have told you what the "gross pay" would be. They may or may not have mentioned the "assignment rate", but the "gross pay" is what they are required to tell you.
From https://www.contracteye.co.uk/umbrella-contractor-employers-nic-costs.shtml :
"There have been well-publicised cases where non-compliant umbrella schemes have illegally deducted employment taxes from workers’ gross pay so you are strongly advised only to use a compliant, trusted umbrella company."
That's not how it works in reality. When you negotiate with the client, you negotiate the assignment rate.
Then if contract falls in-scope you get something inserted between yourself and the client that will be collecting all the revenue tax. This can be an umbrella, but also can be a Fee Payer if you work through your own company.
It's basically HMRC trying to cover up their screw up by trying to hide the fact deemed employee is paying both employer and employer taxes without receiving benefits of neither, using semantics.
I have a letter in hand today from Victoria Atkins , Financial Secretary to the Treasury, in response to my submission that the extension of IR35 has significantly damaged the working prospects of contractors including myself and requesting that the cancellation of the proposed amendment be revoked. Her response completely ignores the issues I raised, but takes two pages to merely re-iterate the status quo with bland assurances the everything is tickety boo.
When dealing with minds like that, artificial intelligence seems to positively shine.
I doubt if she even saw your letter personally, these always get handled by admin staff.
Try politely writing back, addressed directly to her and making it clear that the letter has been CCed to your MP and local paper (and CC them, obviously). That might get her attention.
"CCed to your MP"
My letter was actually forwarded to her by my MP and her response was to him, not directly to me. Not a pennyworth of difference in the nature of the response. These officials are impervious to the needs and positions of ordinary people -- they operate on a theoretical plane that ignores reality in favour of ideology.
"Using an umbrella company gives contractors the option of having an employer that takes care of tax returns, etc while still having some flexibility to work on a contracted basis."
Alternatively --
being made to sign up to an umbrella company you haven't chosen but is forced on you by the agency that sits betwen you and your contract, then being charged fees by it for managing the notional salary it pays you gives you the freedom to be fleeced without redress.
It's no surprise that umbrellas fiddle VAT - they've become adept at fiddling through a lot of practice on contractors.
Do not take the job.
If you are freelance and then take an umbrella role.
YOU JUST PAINTED A VERY LARGE TARGET ON YOUR BACK.
HMRC receive the details from the umbrella company and they link that companies house filings and YOUR tax records and there is the defacto list of people who by doing the same role via different mechanisms ADMIT they are employees.
HMRC have 10,000 cases opened against these people.
Work through an umbrella and your MENTAL.
Many previous contractors I know not only switched from running their own service company to an umbrella, but at the same time switched contracts to avoid HMRC saying "Last month you were outside, this month you're inside for the same assignment. Are you sure you used to be outside? Let us take a look at your recent history".
As for HMRC comparing people in similar jobs, and deciding that there is an inequity, that runs much further than just contractors working through umbrellas. If that is a concern, they need to use the same scrutiny for the big consultancies as well. After all, they're saying they want a level playing field.
As a contractor who has actually been working through one of the large umbrella companies for 14 years (after running my own company for 10 years), long before the latest set of IR35 restrictions, I do not feel that I have a target on my back. Much as I have to apologise to my colleagues who have had to change their working practices, with all the pain that goes along with it, I've been sitting back rather relaxed watching this all go by. I've not had to use an umbrella other than the one I selected so long ago, and the lack of filling in VAT and tax documentation was and remains refreshing since I switched.
When I went under an umbrella, I knew that I would be paying both NI's, plus umbrella fees (and of course the income tax) from the assignment rate, and because I was previously running the payroll and VAT for my own company myself, I knew what these were likely to be. This should have been clear to anyone who thought it through, although at the time. this was not enumerated by the umbrella, so making it clear now is actually much better. The other mandated employment costs, such as the apprenticeship levy have been a burden (if I was still running my own company, I would not cross the threshold where it needed paying), and I've just accepted the workplace pension that was foisted upon me, even though I could probably get a better deal.
The problem HMRC are going after is not the large umbrellas, most of whom talk to HMRC on a regular basis anyway, but the small, often single employee plus a director (who are often out of the country) ones that popped up as a way to avoid paying tax on the umbrella fees, and which also pop up, charge (but don't pay) VAT or the employment costs, and then disappear before the HMRC's searchlight finds them. And they should be clamped down on, because they are unambiguously stealing from the taxman.
But there is a problem here for the contractor/employee. As has already been pointed out, the contractor normally has money in the channel, paid or owed to the umbrella for the work already performed, but not yet sent to their contractor/employee. This money is at risk if the umbrella is shutdown, because HMRC will have a higher priority claim on the money that the contractor themselves, so they could lose it.
I had a similar concern with an agent I once worked through. It looked as if they were going down, as they were getting late paying the invoices to the umbrella, and did not respond to mail or phone calls, while all the time aggressively chasing the company I was providing services to. The umbrella did not want to chase their invoices hard, and at one point, I could have lost 2 months money for work already done if they had gone down. Fortunately, the situation resolved itself (I think that the umbrella finally decided to insist on the payment terms), and I never had a problem for the rest of that assignment. But it is a worry when it happens, and if it were to happen, there is no statuary redundancy, another thing that contractors miss out on.
For IR35 and VAT (Making Tax Digital), HMRC have switched tactics from prosecuting the little person to strong-arming big companies and big departments.
* IR35: Instead of the contractor, it's now big companies or umbrellas who decides the PAYE/VAT/etc. - so HMRC can fine or prosecute the big companies.
e.g. HMRC fining DEFRA and MoJ - https://www.theregister.com/2021/12/21/defra_moj_ir35/
* VAT - Again turning self-employed/small businesses doing their own VAT, it's now the big accounting firms.
* Any case, the umbrella/accounting/big companies, if caught by HMRC, can dump most of it on the self-employed/contractor/small businesses
Win-Win eh?
I hear the Income Tax is next...
This is NOT win win.
Big companies like banks stopped using freelancers and offshored they work to India.
Tax receipts from 10,000 freelancers stopped overnight.
Tax receipts for the offshore £0.00 rounded to the nearest penny.
This is not a zero sum game this is and was always about setting workers against each other.
Bad lazy law IR35.
The point about holiday pay and sick pay is completely false.
If you're working for an LTD as the sole employee and director and choose not to pay your holiday pay or sick pay, that's entirely on you.
If you're running the company properly then there'll be money in the bank to pay for holidays and sickness, should they arise.
If you're taking 100% if the money out in dividends and just using the LTD to avoid tax then this is again, your problem, not ours.
We all know it's a tax reduction scheme and the gig is finally up.
You're entirely right, and this is something I remind my employees colleagues where I work when they compare their take home with the assignment rate that the contractors are paid.
It never seems to sink in to my employee colleagues, who all seem to think that the contractors get to keep far more of the money that the assignment pays than they actually do!
Mind you, on the flip side, many of my contractor colleagues also though I was mad going through an umbrella, and paying more tax and NI (pre-IR35 recent changes) than I strictly had to, but I felt that I wanted to contribute to the society by shouldering a 'normal' tax obligation.
