HMRC has cautioned that some people employed through agencies and umbrella companies who sign up to arrangements that claim to save them tax, could be in effect tax avoidance schemes.
HMRC warned that most employment agencies and umbrella companies operate within the tax rules. However, some umbrella companies and agencies promote arrangements that claim to be a ‘legitimate’ or a ‘tax efficient’ way of keeping more of your income by reducing your tax liability.
These arrangements leave you at risk because you are ultimately responsible for your tax affairs and for paying the correct amount of tax and National Insurance contributions.
These types of arrangements are likely to result in you paying additional tax, interest and perhaps penalties, and are never HMRC approved.
These arrangements may work in different ways, but the companies that use them claim they will help you keep more of your income and reduce your paperwork.
They will tell you that the payment is non-taxable because it doesn’t count as income as it’s a loan, credit, or something similar. These payments are actually no different to normal income, and tax and National Insurance contributions are payable.
The company may tell you that you have to sign up to these arrangements if you want to work for them. If they do, you should seek independent professional advice so that you fully understand the options available to you.
HMRC cautioned that arrangements like these that claim you pay less tax are extremely high risk and said it will always challenge tax avoidance schemes. If you are involved in an arrangement like this, you’re highly likely to be avoiding tax and you could end up paying additional tax, National Insurance contributions and interest. Penalties may also apply.
In summary, HMRC advised that any individuals should get independent professional advice if you’re not sure whether you are involved in this type of tax arrangement.