HMRC have issued new guidance on ‘Tax avoidance schemes aimed at contractors and agency workers’ ahead of the extension of the off-payroll working rules to the private sector.
The off-payroll rules will apply to work done under private sector contracts from 6 April 2020. HMRC are concerned about schemes that use umbrella companies and which claim to increase take-home pay.
HMRC is advising taxpayers to read their Spotlight 45: ‘Umbrella companies offering to increase your take-home pay’ on umbrella companies and tax avoidance, and also to:
- Use the online tax calculator to check what their net pay should be after-tax and NICs.
- Compare this figure with your current take-home pay.
- Ask the person offering the work for a breakdown of how the whole arrangement works including pay rate, fees being charged and what they relate to, whether tax and NICs have been deducted.
- Compare the figures to see if tax is being paid or avoided under the scheme being considered.
The guidance points out that:
- Any scheme offering better take-home pay by converting income into something else (e.g. a loan), and which results in not paying income tax and NICs, is considered by HMRC as tax avoidance and will be challenged.
- Those using such schemes are likely to end up with a bill for tax and NICs, interest on tax paid late and possibly penalties.
- Any fees paid to the promoter of the scheme are unlikely to be recoverable if the scheme does not work and may amount to 10% of the gross pay.
Workers should be wary of employers or agencies who tell them they must use a particular scheme in order to get work and of promoters who tell them that the scheme is ‘HMRC approved’. HMRC do not approve tax avoidance schemes.
Links to our guides
IR35: Off-payroll working
The IR35 tax rules apply when a worker supplies his personal services through an intermediary trading vehicle such as a company or partnership to an end client.
Off-payroll working: PSCs & Private Sector Engagers
The off-payroll working rules only apply in cases where, if you worked directly for the end client you would be deemed to be its employee in terms of the employment status tests.
Spotlight 45: Umbrella companies
This Spotlight highlights that many employees and self-employed contractors are failing to realise that some staff agencies and umbrella companies are flouting tax anti-abuse rules.