HMRC have issued another 'Spotlight', this time aimed at employment agencies and staff bureau warning them that if an umbrella or other payrolling company is offering them seemingly wonderful rates of take-home pay and cut price processing costs, this is very likely because there is tax avoidance (or just plain fraud). They are not applying PAYE and National Insurance as the government intends.

PAYE/NICs avoidance schemes operated by payroll umbrella companies tend to operate by twisting the rules when processing payroll taxes to produce a higher net pay figure. They also save an employment agency PAYE or National Insurance Contributions (NICs). The schemes often take a stance that a worker is not under agency Supervision, Direction or Control, overclaims employment expenses, or recategorises earnings into some other non-taxable form, such as Loans or advances.

These schemes rely on processing payroll for a large number of individuals such as contractors and other temporary workers. The scheme promoters rely on agency and staffing bureau contracts because this provides them with a high volume of lower-paid workers.

In Spotlight 64, HMRC says that Employment and recruitment agencies should:

  • Check carefully the details they are given by umbrella companies about their products.
  • Consider taking independent professional advice if they are unsure if an umbrella company they plan to use is compliant.

As HMRC points out, they have been successful in challenging these schemes in the courts and agencies need to avoid recommending such schemes. They must also carry out 'due diligence' to make sure they are not using non-compliant umbrella companies.

The Spotlight details 'Signs an umbrella company may be operating a tax avoidance scheme'

You should be wary of umbrella companies that:

  • Offer financial incentives significantly higher than industry standards.
  • Provide the workers and agency with different versions of the payslip.
  • Make payments to workers that are higher than the amount on their payslips.
  • Make payments to third parties, who then make payments to the workers.
  • Are based outside the UK.

This is not an exhaustive list.

You could also face financial damage due to penalties and tax liabilities.

HMRC will pursue those who promote or enable tax avoidance. If HMRC defeats an abusive tax avoidance arrangement, they will use the Enablers penalty regime against anyone who:

  • Designed the arrangement.
  • Sold the arrangement.
  • Enabled the use of the arrangement.

Under new powers introduced in 2022, HMRC can publish information about enablers when they suspect they are involved in:

  • Promoting a tax avoidance scheme.
  • Having a role in making a scheme available to use.

HMRC also encourage agencies to report non-compliance in this area. 

  • If you suspect an umbrella company is not complying with the tax rules, you can report it to HMRC.
  • You can contact HMRC for help if you are already promoting tax avoidance schemes.

Useful guides on this topic

Agency workers: At a glance
What is the tax treatment of workers supplied through UK-based agencies, employment businesses or other staff supply intermediaries?

Agency Workers: Employment intermediaries' rules
Subscriber guide: How the Agency tax rules apply? What are the tax rules for Employment Intermediaries and Agencies? Are agency workers subject to PAYE? 

IR35: Off-Payroll Working
You supply your personal services via your own PSC to an agency that supplies you to a small-sized end client

Off-Payroll Working At a glance
What is Off-Payroll Working? What is IR35? What are the tax rules for Off-Payroll Working or IR35? How do you check employment status? What is a personal service company?

Managed Service Company (MSC)
What is a Managed Service Company (MSC)? What rules apply to MSCs? Can you avoid being an MSC provider? What is the accountancy exemption from the MSC rules?  How are partnerships caught by the rules?

External links

HMRC Spotlight 64