25 Nov How To Spot a Tax Avoidance Model
Due to the hike in National Insurance Contributions in the recent budget, one of the unintended consequences of Ms Reeves’ policies is the potential to make contracting a more attractive option for both clients who wish to avoid additional employment costs, and contractors who want to pursue an independent career. If that’s something you’re considering, either as a client or a contractor, here’s our comprehensive guide to spotting, and avoiding, tax avoidance models.
The popularity of contracting
The latest figures show that there are around 4.28 million freelance workers in the UK (as of September 2024), down from a peak of just over 5 million during 2020 when the COVID-19 lockdowns caused many people to reevaluate their career direction. IPSE (The Association of Independent Professionals and the Self-Employed) estimates that in 2022 the freelance workforce contributed around £278 billion to the UK economy and enabled businesses to grow and innovate more successfully, without inherent staffing cost risks.
The most popular sectors for contractors are IT, oil & gas, veterinary, construction, healthcare, media & design, and education and the average day rate for a contractor (across all sectors) is £457.
Contracting is also a great leveller, with high rates of employment for women and people with disabilities, demonstrating that diversity in a workforce benefits everyone.
Umbrella companies
Many contractors have found that an umbrella company is the best option for them. Under an umbrella, you’re an employee, and have none of the worries of being self-employed. You’re entitled to full UK employee statutory rights, have a record of continuous employment, receive contributions to your workplace pension scheme and, most importantly, are fully compliant with HMRC, so your tax and National Insurance Contributions (NICs) are up to date.
At least that’s what you can expect from a fully-compliant umbrella company, like i4.
Sadly, there are still many uncompliant umbrellas which act as tax avoidance models and whose sole purpose is to rip off not only HMRC but also the hard-working contractors they’re supposed to be benefitting.
Let’s look at how you can tell if an umbrella company you’re considering is uncompliant.
Red flags
If you look carefully, there are plenty of clues that an umbrella company is a non-compliant, tax avoidance scheme.
- They will offer a ‘guaranteed’ percentage of your net pay. This is usually significantly above what compliant companies can offer, with a figure of around 84%. When you consider that the basic rate of income tax (on earnings up to £50,270) is 20% and that the main National Insurance rate for employees is currently at 8%, the maths simply doesn’t add up for these non-compliant companies. A compliant company will offer you take-home pay of between 60-70% of your earnings, and make the correct deductions on your behalf to ensure that you pay your fair share of tax and that your NI contributions are up-to-date. When you register with i4 we ensure that all your tax and NI liabilities are paid on your behalf, so you stay compliant and won’t face fines or late interest payments from HMRC.
- They don’t have an online presence and they’re difficult to contact. Your umbrella company should be easy to find and contact. We’re on LinkedIn, our website is easily accessible, we display our address details, and you can contact us via phone, email, or through our contact form, making communication simple for contractors and clients alike. We’re also listed on the Companies House website, making it easy for contractors to verify our existence and veracity. A non-compliant umbrella company will make every effort to avoid being contacted by its contractors, hiding behind holding pages, displaying phone numbers that are never answered, and using email addresses that bounce back. They’re rarely recognised by HMRC either unless they’re on the Name and Shame list.
- Another red flag to watch out for is that tax avoiding umbrella companies invariably have no industry accreditation. This is vital to safeguard contractors’ livelihoods and to ensure that HMRC is not defrauded.
The most important industry accreditation bodies are:
The Freelancer and Contractor Services Association (FCSA), pushes for higher standards in the umbrella industry, requiring its members to adhere to rigorous Codes of Compliance. You can check if an umbrella company is listed in their Directory of Members – our listing is here – to ensure that it is fully compliant.
Professional Passport is the UK’s largest independent assessor of payment intermediary compliance and offers unbiased guidance and clear advice about payroll-compliant umbrella companies. To be listed in its directory, umbrella companies must demonstrate high standards in a wide range of service offerings.
SafeRec allows umbrella companies to process payroll in real-time, as required by HMRC, as well as providing detailed audit reports that are cross-referenced with an HMRC business account.
- Consider how important your payslip is. Whether it’s a hard copy or you access it online, it’s a vital record of how much you’ve earned (and whether you’ve been paid the correct amount) and how much you’ve contributed over the working year and it’s crucial if you need proof of your pay when you’re applying for a mortgage or a loan, for example. With i4 you can access your payslips and evidence of Real Time Information payments (RTIs) through our Contractor Portal so you can access the information and evidence any time you need it.
Non-compliant umbrella companies will make accessing this information extremely difficult, if not impossible, and may even provide you with falsified documentation, to cover up the evidence of their own wrongdoings. This can make your life as a contractor extremely difficult and can put you in an unenviable position with HMRC if you’re trying to prove that you entered an agreement in good faith. - Finally, many non-compliant umbrella companies operate by offering excessive commercial benefits to recruitment consultants as an inducement to get contractors signed up for them. At i4 we believe that the services we offer to recruitment agents, such as cost-effectiveness, quick and easy contractor onboarding, tailored Key Information Documents, an automated and streamlined invoicing process, pension auto-enrolment and administration, and quarterly Employment Intermediary Reports outweigh all the sweeteners that non-compliant umbrellas can offer.
It’s important to be aware that not everyone in the umbrella sector is on your side, either as a contractor or as a client. By doing your research and remaining realistic about what an umbrella company can offer you, you can maximise your income legally, and enjoy all the protections that traditionally employed workers benefit from while making the most of your contractor status.
For more information about how we can help you avoid unscrupulous tax avoidance schemes call us at 0800 084 3058, email us at info@i4services.uk or fill in the contact form here.