Avoiding a tax avoidance scheme as an umbrella company contractor looks like this...

The use of umbrella companies by contractors has long been the subject of interest and concern, culminating in 2023 with a government consultation on regulating the umbrella market outright, writes Sebastian Sauca, chief executive of SafeRec.

Already an afterthought?

While it is the responses from organisations which will likely be given the most weight by HMRC (and already, a consultation roundtable attendee says workers seemed like a “side consideration”), our hope is for the individual contractor to end up benefitting the most from the legislative outcome.

After all, is the individual contractor who day-in day-out has to approach the umbrella market’s ‘offers’ with caution, making sure at every turn that they avoid potentially numerous compliance pitfalls concerning tax and other legislation.

A misleading maze

To drill down further into what navigating this maze of compliance is like I sat down with Elena Nicolaou, a temporary worker, who came perilously close to falling into the clutches of an avoidance scheme.

The hope of Elena and I is that the following account provides the consultation authors, respondents to the consultation, and even first-timer contractors, with some actionable insights into the intricate and sometimes misleading world of ‘umbrella company’ arrangements.

Relayed below in Q&A format, her story features everything ranging from a former taxman now working as an avoidance promoter to the umbrella world being so murky that it drove her permanent.

We hope it serves as an informative but cautionary tale. Indeed, Elena says if the guidance within helps just a single contractor steer clear of avoidance -- like she did – then telling her not always painless-to-recall account will have been worth it.

Q: Please tell readers of ContractorUK about yourself, regarding your work and how you came to use an umbrella company.

I have been working as a social worker since 2013 and I’m now working as a senior social worker in Adolescent Safeguarding in East London. I spent several years abroad working on a few volunteer projects and decided to come back to the UK in 2020, just before the covid pandemic struck, to find a new job.

I started to look for roles with several social services and decided to take up a temporary social worker position in the South West of England.

Advertised by a recruitment agency, the position was exciting but before I could officially start, the agency recommended an umbrella company to process my pay. And not wanting to rock the boat and simply pleased to secure work during a pandemic, I did as they said and went down the umbrella path.

Q: What was your experience of the umbrella company?

During my first few weeks and months dealing with the umbrella, I encountered numerous challenges.

There were recurrent issues related to delayed payments, overlooked expenses, and various other problems around pay and receiving my money.

At one point, I decided to take some time off during my assignment, and to my surprise, the umbrella company created two separate payroll IDs. This led to HMRC being unaware of £30,000 of my earnings. Even now, many many moons later, I find myself still embroiled in a ‘stage 2’ complaint with HMRC concerning this matter.

Despite my persistent efforts to contact the umbrella company to get help, all I received in response were emails assuring me that they would investigate and escalate the matter.

But unfortunately, no action by the umbrella ever followed.

It is astonishing how powerless one can feel in such situations.

To make matters worse, about several months into my contract, a colleague informed me that I was earning significantly less than other temporary workers they knew, who were doing the exact same work also via an umbrella company. Intrigued, I decided to explore my options further.

A second colleague introduced me to a different umbrella company. Burned from my first encounter, this time I approached the umbrella with a sceptical mindset, even arming myself with a pen and notebook to ensure I captured all they said accurately over the phone. This ‘pen and pad’ combo is something I’d recommend to any contractor who gets on a call with a brolly. The claims; sales-speak and jargon can be baffling unless you record it all for your calm reflection afterwards.

During the virtual meeting, this second umbrella quite proudly presented ‘a creation’ by their tax expert. The umbrella said it was a “compliant tax product,” designed specifically for temporary workers like me.

Interestingly, they up front admitted that HMRC disapproved of the creation -- but just as quickly they assured me it was entirely legal.

Then, they began referring to it as a “tax loophole” which would remain open and accessible for about five-to-six years before it would be closed. Even then, they said, a new product would simply take its place.

Next, the umbrella emphasised to me the importance of their company having “accreditation.” And for me and the work I want do, accreditation is important as most local authorities require workers to be engaged via umbrella companies carrying this accreditation, I was told.

Q: In offering you a scheme, did the provider say things to reassure you; to stop you developing doubts or concerns?

Certainly! I now know non-compliant providers often use reassuring language, particularly for workers like me who lack formal expertise in taxation.

A provider might employ phrases like “tax loophole.” As someone who pays attention to detail, I asked numerous questions during my interaction with this second umbrella company, and they made some statements to reassure me everything was above board.

They also claimed to have their own “barrister” who, if need be, could write a letter to HMRC on behalf of individuals should they face inquiries about their taxes. According to the brolly, there was a specific percentage likelihood that I’d need such professional legal assistance. Still, they reassured me that I could simply ignore HMRC's letters initially, and only if HMRC persisted, would the barrister's letter be available to me.

Additionally in terms of terms used, the umbrella spoke of many financial arrangements being in place, notably "backhanders." I found this quite off-putting.

Perhaps sensing my unease, the umbrella then asserted that new tax schemes simply surfaced every few years.

And then quite a revelation -- said I think to try to reassure me -- I was told one of the creators of the scheme which I could use through their umbrella company had formerly worked for HMRC!

Rather than trying to suggest to me that them having an ex-tax official on board was the umbrella’s USP, it was presented like it was a common and legitimate practice. It was implied that using such arrangements was like taking advantage of government-sanctioned loopholes -- and it was rhetorically hinted to me ‘who better to know where those government loopholes are than someone who used to work for the government.’ Plus, they effectively said that while the government might eventually close one loophole, another would simply emerge for utilisation. This latter point was, I later reflected, like the provider saying ‘we’ve got options should HMRC get wise to this specific ruse,’ and ‘there’ll always be another.’ I now know this narrative is code for ‘We’re a Scheme.’

Q: Did you engage with the tax avoidance scheme? 

No, I made the conscious decision not to engage in the tax avoidance scheme.

Before making this decision, I sought advice from an array of people and organisations. I spoke with a project manager involved in recruitment at my current place of employment. Then I reached out to a recruitment agency. I contacted you – SafeRec, too, for guidance. Additionally, I discussed the matter with friends and colleagues to gain their insights. My decision was heavily influenced by these conversations, and I ultimately chose a path that aligned with my values and understanding of the law.

Q: Do you know any workers involved with this second ‘umbrella company’ which if it’s a bonafide umbrella, clearly operated a scheme as well?

No, not directly involved with this company specifically, but I'm aware of an old colleague who is involved with an umbrella company that she says enables her to earn 80% of her gross pay. And so far, she says, without so much as a sniff from HMRC.

When I attempted to engage with this particular umbrella company to learn more, our conversation stalled after some initial pleasantries. Maybe they knew I was planning to sit down for this Q&A, because they never responded to my follow-up attempts to reach out!

I have another friend who has had experience with the scheme-offering umbrella. What’s interesting is that when she spoke with them and her agent, the umbrella company disputed some details from my conversation; details which I noted down – the “tax loophole” reference in particular. But in the end, she too declined their offering because while the projected earnings from the brolly were not as high as 80%, the take-home was still too high to be lawful.

Q: What advice do you have for contractors who uses umbrellas but want to avoid avoidance?

When it comes to dealing with umbrella companies, my best advice would be to invest time in thoroughly researching the umbrella company in question. And then follow your instincts.

Navigating through the numerous voices and opinions can be challenging, but it's a better alternative to relying on too few perspectives.

I found myself overwhelmed to the point where I chose to accept a permanent contract -- the risks and rigmarole in the end just were too much. But the process was crucial in shaping my understanding of the umbrella company market.

I’d also recommend drawing up a list of your own ‘non-negotiables,’ lines you don’t want to cross and if it’s not clear whether the ‘umbrella’ will make your cross them, disengage.

For me, the guiding principles were clear. I did not want to partake in any illegal activities that might lead to an unmanageable tax bill from HMRC. As someone who views themself as a law-abiding citizen, I may not always agree with the tax system but I recognise the rationale behind various aspects of it.

Finally, I’d say when choosing an umbrella company, don't hesitate to shop around. If one doesn't meet your expectations, make a change. Working as a contractor via an umbrella company if the company is legitimate and compliant can bring some genuine advantages. But many of the advantages aren’t always explained very well, so it’s essential for contractors to understand the upsides -- the lawful upsides, especially around holiday pay and maternity/paternity pay.

SafeRec’s assessment

For my part, our software may have forensically audited 56,000 umbrella payslips and I may be familiar with the HMRC liability scheme-using contractors can expect, but I found Elena’s account eye-opening.

Featuring umbrella payment issues, umbrella non-communication, an on stand-by barrister if you’re investigated and even a taxman who’s descended into tax avoidance, her journey over the UK’s murky ‘umbrella’ landscape exemplifies the challenges that genuine workers face -- and will continue to face until proportionate legislation is introduced.

So this interview serves not just as a cautionary tale, but hopefully as a call to action. It emphasises the need for greater transparency, regulation, and support for those who, like Elena, seek to work within the bounds of the law. Let’s hope the government departments behind the umbrella consultation remember Elena when they draw up their framework. That said, even if experiences of umbrella workers like Elena are factored-in to the April 6th 2024 framework, it is enforcement which is going to be the key and to that end, I believe real-time auditing is the answer.