Umbrellas are useful at this time of the year, as the seasons change and the misty drizzle returns. But the right umbrella is critical: if it isn’t sturdy and wind-resistant it may not keep you dry. The same is true of umbrella companies that are used by agency workers, contractors, and self-employed professionals to manage their payroll administration. Most of these companies provide a very helpful service – operating in an IR35 complaint manner. However, others have become the target of HMRC as it believes that they are in fact operating illegal tax avoidance schemes. In Commercial Litigation, our niche tax disputes team, together with our insolvency lawyers and our specialist professional negligence solicitors, offer a full range of solutions in the face of all HMRC tax demands and challenges.
Isn’t tax avoidance legal?
Tax avoidance is not a criminal offence – tax evasion is. Properly ordering your financial affairs so that you do not pay too much tax is an entirely legitimate approach. However, if these arrangements result in us not paying the correct amount of tax that we owe under UK law, HMRC will consider them illegal. They will work to shut down such arrangements and to reclaim any tax lost to them.
Why are some umbrella companies considered to be involved in illegal tax avoidance?
Some umbrella companies use contrived arrangements that give the workers or contractors who use their services some or all of their pay in the form of a loan, salary advance, grant, annuity, or any other payment which does not have to be repaid. Such payments are non-taxable and so do not attract income tax or National Insurance contributions (NICs). HMRC considers that most of these arrangements do not work and are consequently illegal. It has pursued cases against a range of tax avoidance schemes used as alternatives to receiving direct remuneration, with most claims HMRC pursues through court proceedings being found in its favour. More recently several new laws have been introduced to assist HMRC in pursuing tax demands from umbrella companies and other disguised remuneration schemes.
How do you know if you are involved in an illegal tax avoidance scheme?
If you are an agency worker, contractor or self-employed professional using an umbrella company, it is important to be alive to these contrived arrangements and to avoid using non-compliant umbrella companies. You should watch out for any arrangement that allows you to keep more of your income than you would expect, with low or no deductions for income tax or NICs, or that describes the payments you receive as loans, annuities, bonuses, or shares. The old adage of if it seems too good to be true, it probably is – remains a term frequently used by HMRC in its approach to tax avoidance.
HMRC publishes a list of known illegal tax avoidance schemes and the names of those promoting them, and you can check these on its website. If the umbrella company you use is named as illegal or you have other concerns about the legality of the arrangement that you are in, we suggest that you immediately obtain professional advice.
What happens if you are or used to be involved in an illegal tax avoidance scheme?
Although some illegal schemes that involve the use of an umbrella company no longer exist, the consequences of having entered an illegal scheme remain. Any company or individual who is or was involved in one of these schemes may, subject to certain time limits, still be investigated by HMRC and then pursued for the tax HMRC believes should have been paid.
Depending on the nature of the scheme involved, HMRC may pursue the companies involved or you personally for any unpaid income tax and/or NICs, plus interest and possibly a penalty. The calculation of these amounts may not be straightforward, and good professional assistance at this point may be invaluable.
How can working with a solicitor help if you are caught in a tax avoidance scheme?
We can help you by advising on the status of the umbrella company or a tax planning schemes you are involved with, and the options available to you. We will investigate, negotiate, and settle claims and obligations you have with HMRC. We can also bring professional negligence claims against advisors who may have introduced you to the illegal umbrella company or scheme.
IR35 compliant umbrella companies may be very useful to self-employed professionals and other contractors, but some of the aggressive schemes implemented have proved no protection against HMRC scrutiny. As we have expertise in all aspects of tax disputes, insolvency, corporate disputes, and professional negligence in one team, we are able to provide legal advice and support for all possible legal claims and actions arising from tax avoidance schemes. Please contact us if you have any concerns.