What could happen if you use a non-compliant umbrella company?

Hi Ralph

There are several stories in the media from real life contractors who are facing substantial tax bills in arrears. The reality being contractors have largely been duped by umbrellas into thinking an 85 – 90% take home is acceptable. The adage… “if it’s too good to be true, it probably is”. We all want to pay less tax, but you need to be realistic that tax rates start at 20% in the UK for basic income earners up to £34,500 and rise to 45% for those earning over £150,000. Therefore a 90% take home will never be sustainable under any circumstance.

HMRC is a slow-moving machine. It typically takes years for them to investigate liable companies and individuals. This can cause high levels of emotional stress for both you and your family. The thought of becoming insolvent and having your house repossessed can cause sleepless nights. The fact it was your understanding you did something that wasn’t deemed illegal but is now seen as illegal by the HMRC isn’t going to wash in the eyes of a tribunal.

Although many of these schemes have been registered DOTAS (Disclosure of Tax Avoidance Scheme) with HMRC…they will likely come knocking to the workers across their books at a later point from when the scheme initially went under investigation. HMRC do not only consider your tax liabilities for a single year; they are likely to delve into your past tax affairs in detail covering several years. If you do owe, the bill could subsequently be issued for each of those years at once.

Many companies that front tax avoidance schemes do with intent to operate under the radar for a short to medium term. Once the heat turns up, they quickly fold leaving the contractor to pay the tax owed. This can lead to a hefty bill issued to the contractor further down the track with little time to pay in full. Interest will also be applied (although not detailed) and potentially a surcharge. This can cause sleepless nights and unfortunately the tax debt initially issued won’t always end up being the eventual bill. Quantifiably, you could end up paying back more in interest payments and charges if you can't pay it quickly than the tax withheld in the first place.

Once HMRC have contacted you saying you owe thousands of pounds in tax, what is the best course of action? Contact an accountant or a legal professional? Either way it’s likely to cost you more money unless you can secure advice on a pro bono basis. Remember that tax investigations don’t just impact the individual concerned, they also affect their families and livelihood; major factor being the uncertainty about the financial future and worrying about what you will have to concede to clear your debts.

So, when you next think about switching and looking for a new umbrella, if you’re quoted an 85 – 90% take home, it’s not legitimate and will put you at great risk of being pinned a tax avoider in the eyes of HMRC.