How to spot unscrupulous umbrellas overseas

ContractorUK readers considering fixed-term assignments overseas should be wary of international umbrellas promising ‘fully compliant’ tax solutions that yield unrealistically high returns on your income after tax, writes Mike Phillips, a director at ItsInternational.

Your recruiter may have a Preferred Supplier List (PSL) of international umbrella companies. It is reasonable for you to view the PSL as your agency’s endorsement of all the umbrellas appearing on the list. Many see the PSL as a statement of accountability by your agency which means your ultimate selection from that list can be trusted. 

Alternatively, your recruiter may allow you to contract with any umbrella company independently, chosen by you.

Either way, without proper due diligence, you could still be exposed to investigation by the tax authorities in your country of work (and, maybe, in your home country) over future unresolved tax issues.

Ultimately, you need to be aware of associated risks when contracting overseas with any umbrella company. It is important to familiarise yourself with how ‘chain law’, ‘disguised employment’ and other regulations in your country of work could expose you to issues related to tax compliance.

We recommend that you beware any umbrella company offering a ‘solution’ claiming to be very simple while boasting very high returns on your income after tax. Ask if the entire contract rate is declared in the country of work. If not, ask where and how you should be declaring income paid outside your host country.

These so-called ‘split solution’ schemes can be dressed in many different disguises. It requires part of the gross contract rate to be declared for tax and the balance to be paid to you via a structure such as an Employee Benefit Trust (EBT), provident fund, pension fund or investment fund outside the country of work in the hope it will not be discovered by a tax office. Although such a scheme could be legal in the country where the umbrella is based, it may not be legal in your country of work. Accordingly, a substantial and unexpected tax liability could fall exclusively on you. Should that liability remain outstanding, the tax authority in your country of work may widen its net by involving the authorities in the UK.

Other common tactics used by unscrupulous umbrellas abroad to get you on board are to;

• Exaggerate tax-deductible expenses to improve your assignment net return
• Omit from their calculations inescapable costs such as management and accountancy fees which will further reduce your expected net return
• Ignore tax residency issues outside your country of work which could heavily lower your net income return
• Obtain an A1 Certificate for you which is not legally valid in the country of work because you were not living and working in the country of issue immediately prior to arriving in your host country
• Promise indemnity from future investigations. In reality, ‘risk free’ solutions issued by unregulated, commercial enterprises are pure marketing hype and not worth the paper they are written on.

It sounds simple but, ideally, when working abroad you want to engage with an umbrella company which not only makes payments in an appropriate, accurate and timely manner but also provides legal and meaningful tax planning. In terms of simplicity and tax-efficiency in a pitch from an international umbrella, if it sounds too good to be true….

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