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Are you a contractor? You should avoid these schemes

Accelerated payment notice:

This is a notice requiring you to pay the disputed tax up front while the investigation is ongoing. A kind of guilty until proven innocent.

Following the changes to the IR35 effective from April 2017, which makes difficult if not impossible for contractors to use their personal service companies, the number of contractors using umbrella companies have suddenly gone up.

This is not surprising given that it is almost the only option left to contractors to get paid, as some clients will not even engage contractors that choose to continue to work with their PSC while some agency does not operate a PAYE scheme. Thus, leaving umbrella companies as the only option available to contractors.

Umbrella companies do not generally have a good reputation, not least because they tend to fold up frequently and there have been allegations of sharp practices reported by contractors.

like every business, they are in it for the profit, indeed there is nothing wrong with this objective but when it is treading a fine line, it can be problematic for contractors.

The sole function of an umbrella company is to act as an administrative wing of a contract chain, helping the contractor to handle tax and NIC. The advantage to the contractor is that he can engage multiple contracts and have his income processed in one place.

To perform this administrative duty, one would expect it to be straightforward, yes? But no, umbrella companies have different schemes they deploy to perform what appears to be a very easy job. In a nutshell, receive money from a recruitment agency or end-user for work done by a contractor, apply appropriate tax and NI, take a commission for their trouble and remit the rest to the contractor.

For some reasons though, umbrella companies try to maximise their profit or have a competitive advantage over other market players, and in doing so, they used schemes that can have repercussions on the finances of contractors, as HMRC do frown upon these schemes and can retrospectively investigate contractors.

We will briefly look at two of the schemes here.



So HMRC has the following to say about loan schemes:

you are highly likely to be avoiding tax if you are being paid through a loan scheme, you could end up paying additional taxes, penalties and interest.

Loan scheme can be structured in many ways, but primarily, the payment made to you by umbrella companies through the scheme is called a “loan” and so not eligible for tax and NI as you are supposed to return the loan, but because in reality, this money is not returned, it is considered as earnings that should be taxed.

Out of many contractors that get paid this way, very few are investigated because HMRC can only really deal with so many investigations at any one time. The few that are investigated don’t often have legs to stand on nor does HMRC accept any mitigating factors.

According to the revenue, HMRC succeeds in 80% of cases they investigate and prosecute.

umbrella 2.PNG

The consequences of being investigated for loan scheme are indeed very dare:

Accelerated payment notice:

This is a notice requiring you to pay the disputed tax up front while the investigation is ongoing. A kind of guilty until proven innocent.

Inheritance tax:

You may be subjected to inheritance tax; as mentioned earlier, loan schemes are structured differently by different companies, if yours is structured through a trust fund, the consequence is that you may have to pay inheritance tax

Your eligibility to borrow may be affected:

One of the criteria to borrow for a big project like buying a house is to declare your income to meet your lender’s affordability test. HMRC could contact your bank as part of the investigation to find out your declaration of income when seeking a loan. If there are discrepancies between your income declaration to the bank and to HMRC, this would count against you.


In a simple language, HMRC views offshore schemes as tax avoidance measures.

Like a loan scheme, a promise of 90% payment to a contractor from the gross amount worked is likely to be through one of these schemes.

Companies register their businesses in another country which they consider tax friendly or haven. The beneficial owners are not disclosed which can then help facilitate tax avoidance in their resident country.

These schemes are popular among clients with high net worth assets, for example, the Panama scandal, but are also used by some umbrella companies to promise a very high return to contractors.

The problem is, umbrella companies may not make full disclosure of these schemes to contractors, who mainly are interested in highest possible payment but this lack of disclosure or awareness of scheme would not likely be an excuse if HMRC decides to investigate a contractor.

With the current monopoly enjoyed by umbrella companies, there is a high likelihood that the number of contractors using them will continue to grow, until that time when all the various legal challenges against IR35 begin to become effective.



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