Empowering the Freelance Economy

Tax Non-Compliance in the Umbrella Market: What Workers Need to Know

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Any freelancer, contractor or temp worker who has found the ideal project or client but is being forced to work with an umbrella company to get paid, must understand the risks of tax non-compliance

The Problem

The umbrella market is a hotbed for tax non-compliance, with many unsuspecting temps and contractors falling victim to tax avoidance schemes every year. A new report by PayePass, a compliance software and service company, has assessed the damage to workers and the compliant umbrella companies that are forced to operate in a tarnished industry.

HMRC has acknowledged that 99% of the tax avoidance market involves disguised remuneration schemes targeting contractors and agency workers, and these schemes often masquerade as compliant umbrella companies. However, HMRC has consistently failed to tackle these companies, instead targeting umbrella workers with life-changing tax bills.

The Impact on Workers

The impact of tax non-compliance on workers can be devastating. Workers who are caught up in a tax avoidance scheme may be liable for large tax bills, even if they were unaware that the scheme was non-compliant. They may also have difficulty finding new work, as employers are often reluctant to hire workers who have a history of tax non-compliance.

The Challenge for Compliant Umbrella Companies

Compliant umbrella companies face a number of challenges, including:

  • Tax non-compliance: They have to compete with non-compliant umbrella companies that are able to undercut their prices by not paying the correct amount of tax and NICs.
  • Low pay and benefits: Umbrella workers often receive lower pay and benefits than permanent workers.
  • Lack of transparency: It can be difficult for workers to compare different umbrella companies and to understand the fees they are being charged.

What Needs to be Done?

The PayePass report concludes that there is a need for more regulation of the umbrella sector to protect workers and to ensure that all umbrella companies are paying the correct amount of tax. This regulation should include a requirement for the supply chain to conduct robust due diligence on the umbrellas that they work with.

The umbrella industry also needs to do a better job of proving its compliance. This is in everyone’s best interests, as continued false claims of compliance will only exacerbate mistrust of the sector and could ultimately lead to its demise.

What Can Workers Do?

Workers who are considering working through an umbrella company should do their research carefully to ensure that the company they choose is compliant. They should also ask for a written guarantee that the company will pay the correct amount of tax and NICs on their behalf.

If workers are concerned that they may have been caught up in a tax avoidance scheme, they should contact HMRC or a contractor insurance company such as IR35 Shield or Qdos for advice. These companies can act on your behalf should HMRC take up a case against you.

Next steps

The umbrella market is a complex and challenging environment. However, by taking steps to protect themselves, workers can minimize the risk of being caught up in a tax avoidance scheme.

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