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An umbrella company is a business which may be used by a recruitment agency to pay temporary workers. However, many umbrella companies are not tax compliant and umbrella company fraud is widespread. HMRC are taking a number of steps to crack down on fraud by umbrella companies, including educating workers to spot signs of umbrella company fraud. To this end, they have recently published Spotlight 71 which highlights warning signs that an umbrella company may be involved in tax avoidance. Workers are asked to be vigilant and to check their employment contract, pay slips and salary payments for signs that something may be amiss.
Employment contract warning signs
Workers are advised to check their employment contract carefully, including the small print and any disclaimers. Factors which may indicate that the umbrella company could be involved in tax avoidance include:
- an unexpected move to a new umbrella company which happens at very short notice and with very little paperwork;
- signing a contract with one company but being paid by another company which may have a very similar name or be based overseas;
- being asked to sign a new employment contract or a different agreement, such as an annuity agreement in addition to the employment contract.
Signing more than one employment contract is not standard practice and may indicate that the worker is being moved to another scheme.
Pay slip warning signs
A worker has a legal right to a pay slip and it is prudent to check that their pay slip is as it should be. The following are warning signs that the umbrella company may not be tax compliant:
- the PAYE reference, employer name or way in which the worker is being paid changes unexpectedly;
- the pay shown on the pay slip is significantly less than the worker expected to receive or had received previously;
- the amount of net pay shown on the pay slip is less than the amount paid into the worker's bank account;
- the correct amount of tax and National Insurance has not been deducted from the worker's gross pay;
- the worker suddenly receives a hard copy pay slip rather than one online;
- the worker is moved to a new payroll system or is unable to access the online portal of the previous umbrella company to view their pay slips.
Salary payment warning signs
The worker should also check their bank statements to make sure what they are paid ties up with the net pay amount on their pay slip. They should also check that their pay is received as a single payment rather than comprising a number of payments, some of which may not have been taxed.
A move to a new payroll system
An unexpected move to a new payroll system is a red flag. The worker may be told that nothing will change and that the move is because the current payroll has too many workers. Workers should not simply accept this – payrolls are not subject to limits.
What to do if fraud is suspected
Workers who have concerns should raise these with their umbrella company, which might be able to allay their fears. However, if they are involved in tax avoidance, the company may be unwilling to answer questions.
If a worker suspects that their umbrella company is not tax compliant, they should move to a new umbrella company as soon as possible, checking that the new company seems compliant.
Workers can also report non-compliant umbrella companies to HMRC. This can be done anonymously.
Partner note: www.gov.uk/guidance/warning-for-agency-workers-and-contractors-who-are-moved-between-umbrella-companies-spotlight-71