HMRC has unveiled a new tool designed to help contractors working through umbrella companies assess whether the company they are using is involved in tax avoidance. The tool comes at a time of intense scrutiny of umbrella company malpractice and the steps being taken to tackle it, with a greater number of contractors using umbrellas since IR35 rules came into effect in April.
The tool is an online checker available on gov.uk, which largely utilises simple yes or no questions to assist contractors in checking the status of their umbrella company. The tool is based around the three warning signs that HMRC has labelled as indicating that an umbrella company is operating a tax avoidance scheme.
These warning signs are: complicated proposed pay arrangements; a promise of higher post-tax pay than expected; cash bonuses for recommending the umbrella company to other people. These are typical measures that non-compliant umbrella companies will use to lure unsuspecting contractors in.
If a contractor identifies that their umbrella company may be operating a tax avoidance scheme, then HMRC can offer assistance in getting them out of the arrangement. This can help the contractor to avoid possible HMRC investigation, which could lead to a significant bill (plus interest) for unpaid tax or penalty payments.
Measures taken by HMRC to educate contractors about the warning signs of non-compliant umbrella companies and the possible consequences of engaging with them have largely been welcomed by politicians and figures in the contracting industry. However, some have called for the government to go further and introduce regulation to protect umbrella company workers and clamp down on tax avoidance by umbrellas.
