Fresh updates to HMRC’s guidance for contracting through an umbrella company only serve to highlight the prevalence of tax avoidance schemes in the UK, market participants have said.
The government website page, Working through an umbrella company, was updated on February 9 for the first time since November 2022. The update consisted of four new paragraphs on ‘how you get paid’ and five on ‘checking your payslip’.
Despite being described as “the best official guidance yet” in reporting by ContractorUK, industry experts have responded with frustration, arguing that the government isn’t doing enough to stamp out tax avoidance schemes.
“While a step in the right direction, the very fact that guidance like this is needed highlights the extent of the problem,” says Julia Kermode, founder of IWORK, a support body for temporary workers.
“Far too often, it’s workers who pay the price – issued with eye-watering tax bills – while the promoters of these schemes seem to get off scot-free.”
‘Very bad deal’ for the self-employed
The fresh HMRC guidance has coincided with a re-awakening of the public discourse on IR35 tax legislation, with Conservative backbencher Sir John Redwood stating in a Sky News appearance on Sunday that the self-employed are “getting a very bad deal”.
Redwood alluded to the 2017 and 2021 changes to the legislation – which saw most public and private sector organisations become responsible for determining the IR35 status of contractors – arguing that the government must repeal them.
“We want to promote more self-employment [and] make it easier for people to get into self-employment,” he added. “That is the quickest way to expand capacity.”
Redwood’s concerns are shared by Seb Maley, CEO of IR35 specialist consultancy firm Qdos. The potentially punitive nature of IR35 means that many contractors in the UK are a ‘target’ for tax avoidance schemes, he argues.
“Tax avoidance schemes continue to target contractors – many of whom are being forced into working via these operators as a direct result of businesses taking a needlessly risk-averse approach to IR35 reform.
“Leaving contractors with no choice but to operate via dodgy umbrella companies is short-sighted.”
‘Lightweight’ guidance
Maley also bemoans the new umbrella company guidance. While the educating workers on how to spot potential tax avoidance schemes is “key”, it fails to “solve the bigger issue”, he says.
A more enthusiastic take on the guidance is offered by Fred Dures, founder of umbrella payroll auditing provider PayePass, who says that the update was “not a wasted exercise by any stretch of the imagination”.
“The more done to educate all parties about working through an umbrella company compliantly, the better,” he says. “This guidance helps workers and employers spot the more obvious cases of tax avoidance.”
However, Dures criticises HMRC’s failure to address the issue of “skimming” – the practice of deducting small amounts of money from each payslip over a long period of time – in the guidance.
“I can help but feel that the guidance is lightweight in places,” he says. “Given the extent of this immoral, unfair and potentially illegal practice, it’s a glaring omission.”