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Choose wisely – why contractors are still at risk from tax avoidance schemes

tax avoidance

Tax avoidance schemes are still active, and still exploiting contractors. Perform a Google search for “umbrella companies” and you’ll find a number of websites offering to compare umbrella companies for you. We’ve seen similar offers being made on social media too, and this worries us. In principle, comparing loads of umbrella companies to find you the best one is not a terrible idea, but even if those websites are actually comparing real umbrella companies, they’re focusing on the wrong details and that puts you at risk.

Arm yourself against tax avoidance with our free guide: click here to download

Avoid umbrella companies who sell themselves based on a take-home pay figure

Most contractors are now savvy enough to avoid “umbrella companies” who promise high-percentage take home figures, and those 80-90% adverts are becoming rarer. However, we’re still seeing large numbers of adverts based on “maximising your income” or “best returns” which are either misleading or again, are putting you at risk.

The fact is that given the same contract rate, all compliant umbrella companies will pay you roughly the same take home pay. An umbrella company cannot give you a “better return” without breaking the rules, so comparing umbrella companies based on take home pay is at best a ridiculous waste of your time, and at worst it’s a way for non-compliant companies to exploit you.

 Why umbrella comparison sites are likely to lead you into trouble

So, you’ve “compared the umbrella” and you’ve chosen a winner based on the highest take-home pay. One of two things is likely to happen next:

  • They lied to you about the projected take-home pay and you’re actually going to be paid the same as those other, more truthful, compliant and trustworthy umbrella companies said you would.
  • You’ve signed up for a tax avoidance scheme and you may, temporarily, be paid what they promised. We say “temporarily” because at some point HMRC will investigate, the scheme runners will disappear into the ether, and you will be left with a tax bill plus penalties, if you’re lucky. This could take years, but rest assured, it will happen. In the long term you will take home much less than those other, more truthful, compliant and trustworthy umbrella companies said you would.

In either case, you can see why the winner on the comparison site is not the best umbrella company to choose.

Tax avoidance schemes and disguised remuneration

Many tax avoidance schemes work by claiming all or part of your income is a loan. This is called “disguised remuneration” because your taxable income is being disguised as something else. If it was really a loan you wouldn’t have to pay tax on it, which is how the scheme claims to be able to pay you a higher take home pay.

However, the “loan” is not really a loan. If it was, you’d expect to pay it back, and you’d expect to pay a commercial rate of interest on the amount you borrowed. Logically, if you have to pay it back, you haven’t been paid for your work. If you don’t have to pay it back, it’s not a loan and you have to pay tax on it.

What are the risks of using a tax avoidance scheme?

As you might expect, the government lose a lot of money to tax avoidance schemes, and as a result HMRC are very keen to close them down and recover what they’re owed. The best you can hope for is that you have to pay all the tax you’ve “avoided” plus interest and penalties for late payment, but depending on the details of the scheme, the consequences could be much more severe. Even if you were merely following the scheme-runner’s advice, you can expect no sympathy from HMRC, from the courts or from the general public, as “tax dodgers” are extremely unpopular in the current climate.

The Loan Charge

 Designed to combat disguised renumeration schemes in particular, the controversial “loan charge” came into force in April 2019. Under the new rules, any outstanding disguised renumeration loans taken out in the last 20 years became taxable as earnings in the same tax year, meaning most affected tax payers will pay a lot more tax than they would have on the original amount. Many contractors are facing financial ruin as a result.

And in case anyone thought the new legislation would not be enforced, attempts to avoid paying it have already resulted in arrests.

Given that so many contractors are facing such hardship because they used tax avoidance schemes, it may amaze you to learn that such schemes are still operating, and contractors are still being persuaded to use them. By focusing on their take-home pay, many contractors are inadvertently eliminating all the compliant companies from their search, and if you only talk to the rogues, you’re not going to get the right advice. Please don’t fall into this trap.

What is a good way to compare umbrella companies?

If you find yourself needing to narrow down a list of umbrella companies, there are more sensible ways to compare them.

  • Eliminate any who are not accredited members of FCSA. That way you’ll know you’re going to end up with a compliant, trustworthy and competent umbrella company as your employer. This will probably narrow down your search to just a few options.
  • Call the remaining companies and talk to them about their service. Eliminate any who don’t leave you confident in their knowledge and service levels.
  • Even though you’re not comparing take home pay, ask each company for a pay illustration. The illustrations should all be roughly the same, and each company should be able to clearly explain their illustration to you.
  • All the remaining companies will offer employment, including full employment rights. Ask what else each one offers; for example, Orange Genie employees all have access to Orange Genie Edge, our amazing employee benefits and rewards platform.

If you have any questions or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com.

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