There are many clever methods that companies and sole traders use to get around having to pay as much tax as they are supposed to. Sometimes these are legal, some are illegal, and some benefit from living in the grey area in between. 

What is tax avoidance? 

Tax avoidance, as opposed to tax evasion, is when you bend the system’s rules to try and pay less tax than you should. Tax evasion is the illegal act of not paying or severe underpaying your taxes. This is usually done by making a false income declaration or simply hiding from HMRC and making no declaration to the authorities at all. 

To most of us, tax avoidance seems more mysterious and the hard-to-define than tax evasion.

The HMRC, however, disagrees. They have declared in recent guidance that ‘spotting tax avoidance is straightforward’. HMRC advises people to pay close attention to how they are being paid, and to look for signs that they are unwillingly part of a tax avoidance scheme. This applies to people on PAYE, as well as sole traders that pay Self Assessment Tax Returns.

The top things to look out for are:

• receiving more money in your bank account than what is shown on your payslip
• receiving untaxed payments like loans or capital advances

It is always best to speak to your accountant, who can tell you if you are doing something which is likely to get you in trouble with HMRC. 

What is an Umbrella company?

For a while, umbrella companies have been in HMRC’s crosshairs. 

An umbrella company, also known as a PAYE umbrella, is a company that self-employed contractors can join as an alternative to working as a limited company.

An umbrella company acts as an intermediary between you and your recruitment agency (or end client). When you join an umbrella scheme, you are technically a client of the umbrella company, not the person you work for. Umbrella companies will also deal with admin, payroll and other responsibilities associated with running a company. 

Umbrella companies will invoice on your behalf and get paid for the work you complete. They then pay you through PAYE (as if you were an employee of that organisation), deducting costs like taxes, national insurance contributions and pension payments. 

The problem with Umbrella companies

HMRC warns that umbrella companies can be used as disguised tax avoidance schemes. These organisations allow businesses to pay individuals without paying tax on the payment. 

Umbrella companies use the buffer of a 3rd party to reframe taxable earnings paid to a worker as a non-taxable payment. Sometimes part of the amount is paid to a worker and the rest is paid as a loan, grant, capital payment, advance or a whole host of other names. Techniques like this make detecting this kind of avoidance much harder. 

The whole system is designed to reduce the tax liability of the company they are working for or with.

Penalties for enablers of tax avoidance

If an umbrella company is operating a tax avoidance scheme, you may be given a penalty for using them. In addition, HMRC penalises anyone enabling (this includes designing, marketing, selling, or managing) the use of abusive tax avoidance arrangements as identified by HMRC.

The penalty is 100% of the payments you received, or for any actions you’ve taken which enabled the arrangements. If you are given a penalty, HMRC may also be able to publish your details, identifying you as an enabler of defeated tax avoidance.

Final Thoughts

It’s normal to feel unsure. If you’re worried about the way you paid or are being paid, the best thing to do is to seek help. The first step is to read HMRCs most recent guidance here, the second is to contact an expert. We’ve been dealing with worker status and tax issues for decades, and know exactly how to deal with the HMRC beast. Contact us now to put your mind at ease.