Imagine you’re an employment agency and a tempting offer crosses your desk – promising simplified processes, increased savings, and more flexibility for your workers. It sounds like a dream come true, right? But as with many things that seem too good to be true, hidden dangers often lurk beneath the surface.
That’s where HMRC’s Spotlight service comes in, shining a light on these too-good-to-be-true deals. The latest alert, Spotlight 64, is here to help prevent employment agencies from unknowingly stepping into the quicksand of tax avoidance schemes.
In this article, we’ll delve into the critical details of Spotlight 64 and explore the serious consequences that could ensnare those involved with non-compliant umbrella companies.
Employment agencies and the use of umbrella companies
While the UK government is currently looking into the issue of umbrella companies and potential tax avoidance, as things stand, they are not illegal. As an employment agency, using an umbrella company can have several benefits, including:-
- Simplified administration and payroll management
- Compliance with tax laws
- Worker flexibility
- Cost-effective
- Risk mitigation
- Consistency across contracts
- Appeal to contractors
The way some umbrella companies operate has caught the attention of HMRC and the trade unions. The unions have been calling for umbrella companies to be outlawed for some time due to the potential for abuse.
The dangers of using umbrella companies
As we mentioned earlier, sometimes the packages presented by umbrella companies, in this instance to an employment agency, appear too good to be true. Further down the line, there may be issues such as:-
- Misclassification of tax liabilities (e.g. IR35)
- Non-compliance with tax regulations (tax avoidance schemes)
- Potential loss of contractor tax reliefs
- Inaccurate PAYE deductions
- Reduced tax efficiency
The illegal schemes tend to focus on individuals, contractors and temporary workers who may see the headline benefits while unaware of the underlying risks.
HMRC Spotlight 64
HMRC issued a very specific warning to employment agencies tempted to use umbrella companies for payroll and other services. After reading the HMRC Spotlight 64 warning, the situation is much clearer, with some of the initial signs including umbrella companies:-
- Offering financial incentives greater than the industry norm
- Providing agencies and workers’ payslips with different figures
- Enhancing payments to workers, above that shown on their payslips
- Using third parties to make payments to workers
- Located outside of the UK
Many businesses fall into the trap of assuming that where an umbrella company is non-compliant with UK tax regulations (and employment law) they are in some way sheltered from the potential fallout. HMRC Spotlight 64 perfectly illustrates the challenges and the potential reputational and financial damage for those failing to protect themselves.
Potential risks for an employment agency
Financial and business risks exist for those associated with umbrella companies that operate outside of tax and employment laws. These include:-
- Adverse publicity and reputational damage
- Commercial restrictions and broken contracts
- Strained relationship with workers
Non-financial risks to your business can be significant, and very often more damaging than financial penalties are to your cash flow.
Financial penalties
Where your relationship with an umbrella company is found to be non-compliant, you may be pursued for financial damages, penalties and tax liabilities. It’s essential to recognise that while historically, HMRC would pursue those operating these tax avoidance schemes, regulatory changes mean they can also go after those promoting and enabling such arrangements.
Consequently, the enabler’s penalty scheme will allow HMRC to investigate those who:-
- Designed the arrangement
- Promoted the arrangement
- Enabled use of the scheme
Whether an employment agency directly uses the services of a non-compliant umbrella company or directs workers on its books to sign up for such services, it falls under the same HMRC regulations.
Under the new powers given to HMRC in 2022, even before a prosecution, HMRC (via the Spotlight system) can publish information about suspected enablers involved in:-
- Promoting tax avoidance schemes
- Enabling the use by others
While the authorities would need strong evidence to pursue this option, it is proving to be a useful warning system for many businesses and individuals.
Regulatory changes in the pipeline
The government is currently consulting with industry experts regarding non-compliant umbrella companies, with the potential to:-
- Introduce penalties for agencies which fail to carry out the appropriate due diligence
- Identify circumstances where an employment agency would be liable for tax shortfalls (scare tactics?)
Historically, non-compliant umbrella companies have been a significant problem, and we can only estimate the amount of tax that has been avoided.
Without wishing to underplay the potential level of tax recovery, the introduction of these proposed regulations would be seen as a proactive approach to deter fraudsters. They would ensure that employment agencies and other companies carry out relevant levels of due diligence.
Untaxed payments
Before we look at ways in which you can protect your agency and workers from illegal schemes, it would be helpful to identify potential untaxed payments used in such scenarios:-
- Loans
- Grants
- Salary advances
- Capital payments
- Credit facilities
- Annuities
- Profit share
- Bonuses
Scheme operators will often pay an element of a worker’s income through PAYE with additional payments effectively off the books.
While agencies and workers may appreciate the short-term boost in funding, unfortunately for many, they are building up a long-term and potentially significant tax liability. Whether deliberate, naïve or mis-advised by the scheme operator, if you owe tax to HMRC, they will come after you.
Tax avoidance – don’t get caught out!
HMRC is running a formal campaign to reduce the number of people and companies caught up in tax avoidance schemes. The stereotypical assumption that those involved in such schemes were well aware of the details is wide of the mark. Evidence suggests a degree of naïveté amongst some employment agencies and their workers, often drawn into tax avoidance schemes and unsure how to get out.
How can you protect your employment agency?
Taxation and employment laws are constantly changing in the UK; therefore, it’s crucial to have the appropriate advisers to hand. This not only ensures that you are operating within the letter and the morals of the law, but it also allows you to focus on growing your company.
There are several additional measures you can take, such as:-
- Carrying out due diligence
- Being aware of your legal obligations
- Check payslips and payments
- Take extra caution with offshore umbrella companies
- Consider adding protective contract clauses
- Monitor the HMRC list of tax avoidance schemes
- Check a company’s details with Companies House
- Educate your workers as to the potential risks
For many victims, with hindsight, the most obvious red flag was the difference in documentation given to an employment agency and their workers. In this instance, there should only be one income stream and one gross and net figure.
HMRC Spotlight 64: Conclusion
HMRC Spotlight 64 serves as a stark reminder of the challenges businesses and workers face in navigating tax compliance. If a deal seems too good to be true, it likely is, underscoring the importance of having trusted accountants and advisers by your side to navigate the regulatory and moral complexities.
We’re here to help, whether you need guidance before making decisions or assistance in untangling a legal and financial mess. If HMRC Spotlight 64 has raised concerns for you, reach out to us – we’re ready to discuss how to protect your business.