Beware of tax avoidance schemes
There is a growing number of unethical tax avoidance schemes that encourage contractors and freelancers to retain more of their money by paying less than their fair share of tax and national insurance contributions (NICs). Unfortunately, these schemes advertise themselves as compliant, and they’ll often state that their clients “have nothing to worry about.” This is simply not the case, and HMRC is always stepping up their efforts to regain underpaid taxes—even if the offence was many years ago.
Keep reading for more information on spotting a tax avoidance scheme. Be warned – your agency could be in trouble for facilitating tax avoidance, even if it is done by mistake! Accidentally referring your candidates to a tax avoidance scheme could land your agency in serious trouble with HMRC.
What is a tax avoidance scheme?
There is no one-size-fits-all approach to tax avoidance schemes, and they come in many different forms. Recruitment agencies must conduct thorough due diligence before entering into an agreement with an umbrella company and referring your contractors to their service. Tax avoidance schemes (often disguised remuneration schemes) involve the umbrella company paying all or part of a contractor’s salary as a non-taxable payment with the sole intention of increasing their take-home pay. In reality, these ‘non-taxable’ payments are no different from normal income and income tax, and National Insurance Contributions should apply to all of your candidate’s payments.
How to spot a tax avoidance scheme
We’ve collated a list of some easy identifiers to help you spot a tax avoidance scheme and help your candidates avoid them.
Unrealistically high take-home pay
Some companies are offering contractors and freelancers the chance to retain up to 90% of their pay. With the basic income tax rate in the UK being 20%, it goes without saying that 90% pay retention is not realistic or legal. If your candidates can keep this much of their pay, they are probably using a risky and unethical tax avoidance scheme.
Unusual payment methods
Tax avoidance schemes often use unusual payment methods which they claim are legitimate. Payments may come in different forms and from different entities. For example, one payment may come in the form of a loan, and the other payment could be paid via PAYE to make it appear compliant – when, in fact, it is not. If any of your candidates receive their pay via unusual payment methods, they are most likely using a tax avoidance scheme. All income must be paid together and shown on a payslip, and all taxes must be calculated and paid to HMRC on all earnings.
The umbrella company is based outside of the UK
Not all tax avoidance schemes are based offshore. However, if a company is based in the UK, its registered address and information about the directors will be available on Companies House. If it does not appear in the search results, it may be based overseas.
The scheme is ‘approved’ by HMRC
The schemes may advertise themselves as approved by HMRC and, therefore, compliant and safe. This is not true. HMRC does not approve schemes. If your candidates are using a scheme approved by HMRC’, it is most likely a tax avoidance scheme. They should contact HMRC immediately to settle their tax affairs.
Being offered an ‘enhanced’ scheme
Your candidates may be offered a choice between a standard or ‘enhanced’ scheme, which may be described as more tax-efficient. Umbrella employees must be taxed like permanent employees – via PAYE. Therefore, the enhanced scheme is likely to be tax avoidance.
Your candidate’s contract does not state how their salary will be paid
Employment contracts or agreements should state how income will be paid and the deductions made to their pay. If your candidate’s employment contract does not include this information, this could be a sign of a tax avoidance scheme.
Large cash bonus incentives
You may be offered a large ‘cash bonus’ for referring contractors to the scheme. Consider why you are being offered such a large incentive; it may not be as appealing as it seems. Remember, tax must be paid on incentives, and they must be documented. A large cash bonus would likely not be reported.
More than one contract
Your candidates may be asked to sign multiple contracts, which could signify a tax avoidance scheme. Compliant umbrella companies will present employees with one employment contract when they register, which they are asked to review and sign.
The umbrella company has been allocated an SRN
An SRN is a number HMRC allocates to a tax avoidance scheme when they reasonably suspect it is notifiable or if it has been disclosed to them. It helps HMRC track scheme users.
Importance of only partnering with compliant umbrella companies
Legislation introduced by HMRC has made it easier for them to prosecute companies (particularly recruitment agencies) that facilitate tax avoidance or tax evasion. It is essential that your recruitment agency only partners with compliant umbrella companies and has procedures in place to ensure every staff member remains compliant and is aware of the consequences of non-compliance.
SafeRec
Powered by AI, SafeRec’s auditing software is revolutionising compliance within the contractor payroll sector. By referring a candidate to an umbrella company with a SafeRec certification, the worker will receive an automatically generated audit report for every payslip, explaining whether or not the deductions are compliant. Recruitment agencies are also sent a monthly audit summary with all the audit results for all referred candidates with the umbrella. SafeRec helps companies hiring temporary workers remain compliant with complex legislation such as the Criminal Finances Act and prove that they only refer workers to compliant providers.
FCSA
When considering what providers to add to your PSL or partner with, it is essential that you look for the Freelancer & Contractor Services Association (FCSA). The FCSA is a leading professional body committed to ensuring the supply chain of temporary workers is ethical and compliant with UK tax law and HMRC legislation. We underwent comprehensive audits by independent employment and legal professionals to achieve this prestigious accreditation.
FCSA accreditation says it all—its members are compliant and ethical and have your agencies’ and candidates’ best interests at heart. Churchill Knight Umbrella is proudly accredited by the FCSA. To view Churchill Knight Umbrella’s official FCSA listing, please click here.
The benefits of partnering with Churchill Knight Umbrella
We’re delighted to work with hundreds of recruitment agencies throughout the UK. By partnering with us, you’re teaming up with an umbrella company you can trust. We’ve built a reputation we’re proud of, and you can be assured that your recruitment agency, consultants, and candidates will become our priority.
Here are a few reasons why you should contact our friendly Agency Team today to arrange a meeting in your office:
- Agencies cannot afford to have a non-compliant payroll provider on their PSL, and we are incredibly proud that Churchill Knight Umbrella has achieved the prestigious FCSA accreditation. You can refer your candidates to us with total peace of mind.
- Being a SafeRec-certified umbrella company benefits our recruitment agency partners greatly. They can check the payslips of the candidates we process payroll for and prove to the entire supply chain that they are only referring candidates to a compliant provider. This provides an additional layer of protection against legislation such as the Criminal Finances Act.
- We are partnered with IR35 specialists who can help your end client and your agency with IR35 assessments, Status Determination Statements, and more.
- When you partner with Churchill Knight Umbrella, you will have a dedicated Business Development Manager and Account Manager to support your business and your candidates. You will also have access to our Payroll and Compliance Team, who will be happy to answer any questions you may have.
- We make it our priority to stay up-to-date with the latest news and legislation affecting the supply of temporary workers, and our Agency Team would be happy to deliver training at your office for Consultants who want to learn more.
- Your candidates are your priority, and we respect this. You have our word—they’ll become our priority, too. We recently established an Onboarding Department to ensure your candidates’ registration is seamless, and we always go the extra mile to ensure the service we deliver is beyond expectations.
- We work in a highly regulated industry and take our compliance very seriously. However, it is also great to have some fun along the way! When you partner with us, you will have access to various fun and exciting competitions with the chance to win fantastic prizes. Keep an eye out for emails and social media posts.
Compliance will always be our priority
Churchill Knight Umbrella is proud to be one of the first UK umbrella companies with both an accreditation from the FCSA and SafeRec Certification. We're partnered with hundreds of agencies who equally value compliance and service, and we ensure all of the temporary candidates (contractors and freelancers) that are referred to us receive an exceptional payroll experience - from the initial calculation we provide them to processing their pay for the first time.
The FCSA is the UK’s leading professional body committed to ensuring the compliance of the supply chain of temporary workers.
SafeRec is revolutionary, and having a PSL exclusively composed of SafeRec certified umbrella companies will protect your business and candidates.
Refer your candidates to an umbrella you can trust
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