HMRC (His Majesty’s Revenue & Customs) is cracking down on umbrella companies used by contractors to pay their taxes, with 10,000 tribunal cases pending. The number of individual incidents increased sevenfold in a year from the 1,200 documented at the end of June 2021 to over 10,000 at the end of June 2022.
If HMRC determines that you have engaged in tax avoidance by using an umbrella company, they may take enforcement action against you. This could include the assessment and recovery of any unpaid taxes and National Insurance contributions, plus interest and penalties. They may also investigate the umbrella company to ensure that it is operating within the law. Additionally, if HMRC believes that you have deliberately avoided tax, they may consider pursuing criminal charges. It’s important to respond to HMRC’s letter and seek professional advice to understand your options and potential risks.
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Umbrella Companies & the Tax Tribunal Backlog
An umbrella company handles payroll and reduces tax costs for contractors on temporary contracts.
The tax tribunal backlog has significantly increased in a relatively short period of time due to the enormous number of umbrella companies suspected of VAT avoidance. If a contractor is considering joining an umbrella company, they should be aware that it’s likely the umbrella company will have to pay VAT. Any assertions to the contrary will be treated suspiciously by HMRC.
The adoption of IR35 tax reforms by the government in April 2021 rendered businesses that use freelancers liable for the tax their contractors should pay. As a result, the use of umbrella companies by freelancers, especially tech hands-for-hire, has skyrocketed.
Umbrella firms operate as intermediaries for temporary contractors and employers, processing their pay and providing payroll, tax, and other back-office services. According to the Association of Independent Professionals and the Self-Employed, more than a third (34%) of freelancers are employed through umbrella businesses.
In order to reduce the backlog of tribunal cases, HMRC and the tribunal are working rapidly. HMRC is confident they will prevail and will begin collecting the VAT it feels it is owed.
The tax affairs of contractors is one area where HMRC believes it is missing out on a significant amount of unpaid tax. It has made umbrella corporations their focus now.
A spokesperson at HMRC told The Register, a technology news publication, “We are challenging those responsible for Mini Umbrella Company (MUC) fraud using both civil and criminal powers. This includes deregistering tens of thousands of MUCs that we suspect were taking advantage of the VAT Flat Rate Scheme and denying them access to the Employment Allowance.”
“When it is shown that a business in the supply chain knew about the fraud or should have known about it, we have made a number of arrests in connection with MUC fraud and also taken action to recover input tax in those circumstances.”
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