The government’s tax department plans to crack down on umbrella companies avoiding paying workers and their taxes.
HMRC has issued a call out for evidence on umbrella companies which hire thousands of temporary staff over concerns the companies avoid tax and breach worker’s rights.
Umbrella companies act as an intermediary between recruitment agencies and workers. HMRC has identified umbrella companies as a tax risk because they can be set up easily at minimal expense and quickly closed down or abandoned when the taxman seeks to recover the sums due.
The largely unregulated companies are also being placed under scrutiny over concerns they “skim” money off worker’s payslips and inflate deductions to retain money owed to the employees they engage. Employees are also denied holiday pay even in situations where they are entitled to it.
Andy Chamberlain, Director of Policy at the association of Independent Professionals and the Self-Employed said: “We and many others have long stated that the sector is crying out for better regulation around umbrella companies, and we therefore welcome HMRC’s renewed focus on this area.
“Lack of regulation has caused a wild west, with there being well documented problems around the use of tax avoidance schemes,” Chamberlain continued.
“Any potential reforms from HMRC following the call for evidence will be long overdue and much needed in order to instil confidence around the use of umbrella companies by self-employed workers and businesses,” he added.
The tax authority’s callout for evidence noted that disguised remuneration schemes are common practice for umbrella companies, which pay employees using loans instead of ordinary income to avoid income and national insurance contributions.
HMRC said that lost revenue from this type of tax avoidance avoidance has fallen from £1.5bn in 2005-06 to just £0.5bn in 2019-20. However, the use of disguised remuneration schemes continues to cheat the government out of millions of pounds in lost taxes.