In a recent article, we highlighted the risks that contractors and freelancers face when searching for a compliant umbrella company online. Frustratingly, while most umbrellas provide a trustworthy and compliant service, tax avoidance schemes are posing as compliant providers, and engaging with these companies could land you in serious trouble with HMRC. Keep reading to learn more about the common differences between compliant umbrella companies and tax avoidance schemes.

Compliant umbrella companies

Compliant umbrella companies process the payroll of contractors and freelancers in accordance with HMRC’s tax system – Pay As You Earn (PAYE). Therefore, the umbrella will receive your gross funds and then make the necessary and legal deductions (income tax, National Insurance, employment costs, etc.) before transferring your payment to your personal bank account – supported with a payslip.

In the umbrella company sector, a small number of accreditations help compliant-driven providers prove their ethical processes. For example, when searching for a compliant umbrella company, it’s a good idea only to use those with one or more of the following accreditations:

The Freelancer and Contractor Services Association (FCSA)

The FCSA’s website states:

“FCSA’s aim is to ensure all parties in the supply chain – especially those served by FCSA members – can expect the highest levels of compliance, transparency, and reliability. We hold our members to the highest standards of compliance in the industry, which drives market reputation and benefits workers.”

Churchill Knight Umbrella accredited by the FCSA and you can find our official listing here.

Professional Passport

Professional Passport claim to be the “largest independent assessor of payment intermediary compliance.” The Professional Passport website states they “go further and test against all relevant legislation, not just HMRC tax rules.”

You can find a list of umbrella companies with Professional Passport accreditation here.

SafeRec

SafeRec’s “AI technology revolutionises payroll compliance” by allowing umbrella company employees to instantly receive payslip audits when they are paid by an umbrella company – in real-time. These audits will provide a breakdown of all the deductions made by the umbrella and provide unrivalled insight into an umbrella company’s processes – to provide contractors and freelancers with the reassurance they need to know they’re being paid correctly.

Churchill Knight Umbrella is a SafeRec certified umbrella company and you can find our official listing here.

Tax avoidance schemes

Tax avoidance schemes can be difficult to identify as many promote themselves as “compliant”. However, it’s important to remember that as a UK taxpayer (and an employee of an umbrella), you must be paid with Pay As You Earn (PAYE), and your funds must be sent to your personal bank account.

Over the years, criminals behind tax avoidance schemes have devised creative methods of paying workers to reduce the amount of tax and National Insurance they owe. For example, tax avoidance schemes have been known to pay workers in credits, shares, loans, etc.

Compliant umbrella companies vs tax avoidance schemes

The table below summarises the main characteristics of compliant PAYE umbrella companies and the common signs of tax avoidance schemes. Tax avoidance schemes operate in many different ways. Therefore, the below is for guidance purposes only. Before registering with an umbrella, you must conduct thorough due diligence, as ultimately, you are responsible for paying the correct tax and National Insurance Contributions.

  Compliant Umbrella Company Tax Avoidance Scheme
Processing payroll Will operate Pay As You Earn (PAYE) – HMRC’s tax system for employees. The umbrella will receive your gross funds and make the legal deductions (income tax, National Insurance, employment costs, etc.), before transferring your pay to your personal bank account. Will not process your pay with PAYE. Tax avoidance schemes usually process payroll in unusual ways, including issuing credits, shares, loans (which don’t need to be repaid), and more – just to reduce the amount of tax and NI contractors are responsible for.
Take home pay Your take-home pay through a compliant umbrella company will vary depending on how much you earn and how frequently you work. However, it’s a safe assumption that you should expect to retain between 50% and 75%. Please contact us for an accurate take-home pay calculation based on your circumstances. Tax avoidance schemes usually offer contractors and freelancers inflated take home pay – sometimes as high as 90%. As a UK tax payer (and employee of your umbrella), you are legally required to be paid with PAYE. Therefore, any offers of inflated take-home pay should instantly trigger alarm bells. Do not be fooled!
Location Based in the United Kingdom. Often located in well-known tax havens, including but not limited to, the Channel Islands, Isle of Man, Caymen Islands and the Philippines.
Ownership Clear information on Companies House should show that the umbrella company is owned by professionals with a trading history in the United Kingdom. Often owned by people with no history of business in the United Kingdom. A recent fraud (mini umbrella companies) involved using essentially random directors for businesses with no trading history – making it difficult to identity the people behind these organisations.
Accreditations Compliant umbrella companies are likely to showcase their professional accreditations on their website. The most reputable accreditations that umbrella companies can have are FCSA membership (The Freelancer and Contractor Services Association), Professional Passport membership and SafeRec certification. Churchill Knight Umbrella is accredited by the FCSA and certified by SafeRec. Tax avoidance schemes have been known to advertise themselves as having professional and reputable accreditations, even though this is untrue. Always check that an umbrella has a professional accreditation by checking the providers website. Also, some tax avoidance schemes promote their alliance with accreditation bodies that are not well-known in the sector and do not have positive reputations.
Expenses Since the introduction of legislation called Supervision, Direction and Control (2016), most umbrella employees are not eligible to claim tax relief on travel and subsistence. Compliant umbrella companies will have processes in place to assist employees reclaiming legitimate expenses (costs that have incurred as a direct result of carrying out work on the assignment – such as agreed overnight stays, etc.). Any payroll provider actively promoting the ability to claim expenses and suggesting you can claim a wide variety of expenses is probably a tax avoidance scheme.
Risks When you use a compliant umbrella company, you do not face any risks – as you are being paid correctly and in accordance with HMRC’s rules and regulations. Should you underpay tax and/or National Insurance, you face the risk of being investigated by HMRC. You could face a life-changing tax bill, as well as additional penalties.
Reviews Check the online reviews (Google and Trustpilot) for an umbrella company to get a good impression of their level of service and commitment to compliance. The best umbrella companies in the UK will have an established trading history and should have received plenty of reviews over several years. Read the reviews carefully and see what contractors and freelancers are saying. Churchill Knight Umbrella has a 4.4/5.0 rating on Google and 4.8/5.0 on Trustpilot. Typically, tax avoidance schemes aren’t around for long. It’s common for these companies to launch, unethically process payroll for 3-6 months, and then close. The people behind these companies will then create another tax avoidance scheme company – and the cycle continues (leaving little trace). With this in mind, it’s unlikely that a tax avoidance scheme will have a wide selection of genuine positive reviews over a long period.

 

What should you do if you think you are using a tax avoidance scheme?

If you believe you’re currently involved in a tax avoidance scheme, HMRC encourage you to contact them to settle your tax affairs. HMRC will “support you” and “help you get out of the scheme and settle your tax affairs”. The email address you can contact is CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk.

For more information and additional contact details, please visit the following page the government’s website: Tax avoidance: getting out of an avoidance scheme.

Churchill Knight Umbrella

Founded by experts with over 25 years of experience in the contractor payroll sector, Churchill Knight Umbrella is a leading PAYE payroll provider committed to compliance. We’re proud to be an accredited member of the Freelancer and Contractor Services Association (FCSA), and we’re also a SafeRec certified umbrella.

When you register with us, you’ll have access to an array of benefits, including:

  • Same Day Faster Payments – We will process your payroll the same day we receive your funds from your recruitment agency/end-client.
  • Free £25 million insurance cover – All of our employees are protected with £10 million Employers Liability Insurance, £10 million Public Liability Insurance and £5 million Professional Indemnity Insurance. If you require a higher level of insurance, please get in contact with us.
  • Employee Benefits – Including Statutory Sick Pay and Maternity/Paternity Pay.
  • Fantastic Support – Our dedicated Customer Support Department is on hand to answer any queries you have, via phone and email.
  • Easy onboarding – We’ve streamlined our registration and onboarding process to ensure it’s as easy as possible for you to register and get paid compliantly.
  • Payslip audit reports – As part of our SafeRec certification, all our employees have access to payslip audit reports – every time we process payroll. Therefore, once we have paid you, you can check you’ve been paid compliantly and no discrepancies are present.
  • Salary sacrifice – Churchill Knight Umbrella is one of the few umbrella companies that offers salary sacrifice for pensions. If you’re interested in tax-efficiently boosting your personal pension pot, please contact us to day to discover how easy salary sacrifice is with our umbrella service.
  • Churchill Knight Rewards – Are you interested in saving money when eating out and shopping online? Churchill Knight Rewards, our exclusive employee reward scheme, has dozens of fantastic benefits. You can also take advantage of reduced gym membership, access to a 24/7 GP hotline, a special BP fuel card, and more!

Please complete this short form to request a free, tailored and accurate take-home pay calculation from our Sales Professionals. Alternatively, you can request a call at a convenient time. Our Sales Team can be reached by calling 01707 871622, or by completing the form here.

Further reading

Before you register with an umbrella company, it’s essential you understand how they operate and how they will process your payroll. Here are some helpful articles on the Churchill Knight Umbrella website you should check out:

If you have any questions about umbrella companies, please visit our recently updated Umbrella Company FAQs. You can also email the Marketing Team with suggestions for new articles – marketing@churchill-knight.co.uk.