Not all umbrella company PAYE schemes are what they seem says contractor tax specialist
In a recent LinkedIn post, Graham Webber Director of Tax at WTT Consulting, which is a specialist in contractor tax, highlighted that contractor tax schemes are often presented by promoters as “compliant” with UK tax rules since they subject sums of money to PAYE. But what if that PAYE scheme is an entity in a tax haven, such as the Isle of Man or Channel Islands? What are the chances an offshore PAYE scheme is going to land a contractor in trouble down the line? According to Webber, any offshore scheme or extremely complicated agreement could be a sign to walk away.
If a PAYE scheme has an HMRC reference number, surely it’s OK?
Webber says an umbrella company can apply for an offshore PAYE scheme from HM Revenue & Customs and even be given a reference number. The umbrella can prove that it deducts a small amount of tax from a small proportion of the total reward and pays it over to HMRC.
“That’s all well and good,” says Webber, “until HMRC arrives later and says that the whole of the sum paid should be taxable as employment income.”
“The primary obligation for that tax falls on the employer and the means of collection is the PAYE system,” he says.
He continues, “Simple enough you think. The PAYE system has some teeth and HMRC can take steps to recover sums it thinks it is owed. Except now HMRC says that they can’t use their powers because the PAYE scheme operator is “offshore.”
He explains that HMRC has accepted an application for a scheme (arguably giving the scheme some legitimacy), and has accepted money for tax (which is a credit against employee liability), but is unable to use their toolbox of implements to extract what they think is actually due.
If your PAYE scheme is in a tax have: refuse it
“Here’s a free piece of advice,” says Webber:
“Rather than issue notices about the dangers of “schemes” which only those advisers like us actually read, if PAYE scheme applications from known tax havens are made – refuse them.
“In one move the schemes have lost a key selling point and credibility and anybody using them would surely question why this was happening.”
The Freelance Informer wanted to know what how a contractor could find out if their umbrella uses an offshore PAYE scheme and what to do if they do and the contractor’s recruitment agency is urging them to still use the said umbrella company. Should the contractor walk away from the job opportunity or insist an onshore PAYE scheme?
“I would say that most “umbrella” schemes that advertise themselves as “compliant” should have no problems showing that they are UK resident with a UK PAYE scheme. If they cannot – walk away.
If they can’t/won’t answer – ask HMRC.”
“I would say that a recruitment agency “forcing” the use of a particular umbrella is probably acting illegally and there must be a reason for their position, possibly tax avoidance, so walk away.
“Offshore PAYE schemes are spread across all ranges of salaries but it has to be said that the public sector and health-based jobs seem to be a target.
“The key here is that for 20 years or more, contractors have been pushed around by agencies, promoters, recruiters and others and many have paid the price for a supine acceptance of that situation.
Surely seeing thousands of contractors facing life-changing tax bills is enough to convince others to take more care and ask more questions?”
Another umbrella company red flag: too many documents
Webber also suggests is you are approached with a scheme that seeks to pay you for work done in a manner that requires you to “sign many documents and have a hopelessly complicated payslip or credit system, step back and ask what the unblinkered facts would reveal and what the tax law applying to those facts might be.”
“If you find a scheme that says payment for doing your day job is not taxable, let me know because it would be the first I’ve ever seen in 46 years,” says Webber.