HMRC Umbrella Companies Relationship
What is the HMRC Umbrella Companies relationship?
Are HMRC happy with contractors using umbrella companies or would they rather they didn’t?
We get an expert to look at it here.
What does the term Umbrella Company mean?
Whilst the answer would seem obvious it is important to understand that there were seemingly no national guidelines from a Revenue perspective that defines what an ‘Umbrella Company’ is.
This situation is unlikely to change in the very near future. Each arrangement between an umbrella type company and the Revenue is a local arrangement. The Revenue treat that process as they would any other business.
So the term ‘umbrella company’ can encompass many forms of employee management services (another term used).
These range from:-
- companies deducting tax and NI at source and allowing some business expenses (vanilla umbrella),
- composite schemes (providing shares in a company structure to allow dividends),
- offshore schemes,
- employee benefit trusts based schemes and
- any combination of the above.
Many of the more elaborate schemes purported to help ‘avoid’ IR35. This, of course, will have interested the Revenue. That’s particularly as HMRC has lost most, if not all, IR35 cases brought to court).
How Does the Inland Revenue View Umbrella Company type services?
Prior to the 2004 budget it was pretty safe to say that the Revenue seemingly did not have a national policy for handling the variety of guises that the term umbrella company describes.
In reality the new legislation addresses the need to report tax avoidance schemes. It is clear that some forms of umbrella company operations will need to work within those laws.
We should not kid ourselves that HMRC is unaware of what an umbrella company is. However, they do seem to allow quite a large measure of difference to be in play. That’s even for the vanilla flavours of Umbrella Company.
The reporting of ‘tax avoidance’ schemes would seem to partly address some of the more dubious operations along with a change in how they tax dividends.
The other question is whether the Revenue see these type of businesses as a good way of collecting Tax/NI or simply a way of avoiding paying PAYE/NI.
One can argue that the new legislation addresses schemes that purport to provide high net pay returns, whilst allowing the vanilla versions to continue collecting good levels of Tax/NI on behalf of the Revenue.
Does the Inland Revenue consider Umbrella companies to be tax avoidance schemes?
As stated previously the imposition of new legislation almost certainly addresses certain forms of Umbrella company operations. The accountants, advisors and owners of those businesses will need to be sure that their version isn’t an avoidance scheme.
Again, they use the term ‘umbrella company’ to describe a variety of services. They can be at both ends of the avoidance rulings.
So in one form, should they view a vanilla umbrella allowing genuine business expenses, with proper audit procedures, as an avoidance scheme?
If that umbrella business has satisfied HMRC locally that it has a genuine business modus operandi then how can it be avoidance?
The problem with that argument is then based on the fact that the more ‘generous’ schemes will use the same arguments locally to also attempt to prove the case.
Again, we should not underestimate the Revenue being aware of these discrepancies and it would seem the avoidance legislation will attempt to address this.
For contractors the old adage of ‘If it seems too good to be true then it probably is’ holds true. There is no such thing as a risk free offer in this context. HMRC would seemingly realise that they also have a duty to look at how they police and authorise these.
The Future HMRC Umbrella Companies Relationship
The umbrella company is here to stay.
Since the introduction of IR35 and recent legislation this form of working will continue to flourish.
The form of how individuals are employed and work will continue to fuel this. Those umbrella companies that provide a sensible level of return, good service and are clearly not purporting to be avoidance will survive and grow.
There are still many benefits for many people of working this way and this is unlikely to change.
A few rogue companies will fall by the wayside. The danger is that their association with the term umbrella company will sully the reputation of the genuinely decent ones.
Perhaps a new form of umbrella company term is needed – suggestions please.
It looks like the HMRC Umbrella Companies relationship is pretty strong.
Rob Crossland – Service Director – Parasol IT
This article is for general guidance only. IT is not a substitute for professional advice where specific circumstances can be considered.
Whereas the greatest of care is taken in providing this information, neither Rob Crossland nor Parasol IT Plc do not or can accept any liability for any action taken or not taken in reliance upon the information provided in this article.