Umbrella White PaperPosted 1 month ago
Umbrella White Paper
Firstly, why is the UK Construction Industry particularly at risk of encountering tax-avoidance?
It is no secret that Brexit’s repercussions include among them a shortage of talent in the Construction Industry. Combine this with the mass retirement of those who entered the building trade in the 1980s, and the aftermath of the global pandemic, Construction is undoubtedly facing a crisis of labour supply.[i] Given continued relentless market demand, the skilled workers who are available, are obviously in high demand. To appeal over competition, wages are naturally driven up as an incentive to attract the diminishing talent pool.
Consequently, agencies and labour providers are feeling the pinch, trying to keep their charge rates competitive while wages are being driven up by workers expecting a higher take-home pay. Which is where tax-avoidance comes to appeal, since the extra revenue can be used to supplement the agency margin.
How does this happen?
Each level of the supply chain presents an opportunity for uncertainty regarding pay and responsibility over tax. Evidently then, with an intricate and multifaceted structure, Construction supply chains (CSC)’s are not only geared towards cost reduction, but inadvertently are susceptible to misgivings. As Richard Lowney, an expert in VAT matters, highlights “Out of a total VAT take of c.£130bn, the estimates loss of VAT from the construction sector is £80m. Construction has historically been a prime target for tax authorities, and more particularly governments looking to be seen to counter tax fraud.”[ii] Moreover, according to the Department for Business Innovation & Skills’ Research Paper, to have upwards of 50 Tier 2 suppliers and sub-contractors is usual for most construction projects, confirming labour supply chains as a high-risk area for tax avoidance according to HMRC, whether deliberate or accidental.[iii] Consequently, Labour provision is one of only five sectors specifically highlighted by the HMRC as an area undergoing live investigations. Currently, the HMRC has 7 Live Corporate Criminal Offence (CCO) Investigations, with a further 21 under review, demonstrating HMRC’s renewed, aggressive pursuit of business tax avoidance.[iv]
Changing location, changes in management, changes to VAT and changes in legislation all contribute to the possibility for misinformation. Absolute Outsourcing, who trade under the name AOL, exemplifies this flux. The Umbrella company pays employees a rate equivalent to the National Minimum Wage rate, and the employee enters into a loan agreement with AOL, under which the employee receives ‘Advance Payments’ of up to £5,000. Another Umbrella company named for tax avoidance is Gateway Outsource Solutions Limited (GOS) which is registered in Malta. Like AOL, GOS Malta makes two payments, one of which is based on the National Minimum Wage, and a second ‘advance’ which is not made through payroll and consequently is not taxed.[v] Clearly, there is a ‘type’ of scheme here to be aware of – this includes unusual payments and Umbrella companies registered outside of the UK, just two of the ‘red flags’ this report highlights below. Beyond tax-avoidance Umbrella companies, irregularity in the Construction Industry is further facilitated through the lack of any real representation for freelancers and contractors, especially given that the Freelancer and Contractor Services Association (FCSA)’s legitimacy has recently been called into question.
What is being done to tackle the problem?
Though Government legislation is undeniably slow to come into effect – exemplified by the fact that VAT changes expected to apply to suppliers and subcontractors from 1 October 2019 were delayed by a year – the two following Acts are worthy of mention. [vi]
The Criminal Finance Act (2017). This holds businesses accountable for tax-avoidance, meaning those in a position of power could be imprisoned / charged with fraud. This law leaves no room for weak excuses like ignorance to come into play.
Secondly, the Onshore Employment Intermediaries Legislation, introduced in 2014 to tackle sums of money which the UK government was missing due to non-payment of tax. The tax avoidance was due to employers’ falsely claiming to be self-employed despite in fact working through an intermediary (usually an agency).[vii]
This report has exposed the very-real risks of tax-avoidance for contractors, businesses, and umbrella companies alike.
So, what is the solution?
Below are five basic steps a company would be advised to follow –
Firstly, increased understanding and awareness of potential tax avoidance methods.
This could look like:
- Making advice clear and accessible
- Simplifying the tax-system as a whole
- Publicising names of disreputable umbrella companies such as AOL, GOS Malta and Paybox Umbrella Limited (PUL) Malta.
- Recognising and highlighting patterns of tax avoidance.
Secondly, ensuring that processes are robust and that compliance checks are made so that risk of tax avoidance is minimised
This is safeguarded by putting measurements in place such as:
- Having regular compliance audits
- HMRC checking company compliance
- Backing legislation with fines and/or disciplinary action
- Have governance in place to protect against risk in the supply chain / procurement process
Third, the use of technology: throughout the entire labour supply, systems can provide transparent and impartial data.
Fourth, to lead by example: with management providing clarity on all aspects of the workforce.
Lastly, have a framework with a clear Service Level Agreement (SLA) and defined Key Performance Indicators (KPI’s) which can effectively manage performance. Performance in terms of quality of supply and in terms of payment methods, while highlighting issues such as modern slavery, tax avoidance, social value and environmental impact.
What is an SLA, and how will this help?
“An SLA functions as a documented understanding between the entity providing the service and the one receiving the benefits of the service.”[viii] It helps to have written documents to refer to in processes of pay so that terms and conditions are visible and to-hand for ease of reference.
How can we help?
Nutral offers open-book transparency, using technology to better existing services – for example, AI can be used to detect any anomalies in tax through backchecking pay slips. This increases security for all parties, through minimizing the risk of tax-avoidance.
Nutral’s summary of the latest HMRC guidance:
The government has recently (25 Aug 2022) produced guidance for contractors employed by umbrella companies. This advice (Spotlight 60) concerns tax avoidance.
Using an umbrella company?
Here are some red flags to watch out for –
- Brief contracts lacking T’s and C’s
- Being asked to sign more than one contract (there should just be one employment contract)
- Being offered an ‘enhanced’ / ‘tax efficient’ option
- Umbrella companies offering higher take-home remuneration, remember that 20% is the basic rate for Income Tax, and that on top of this comes NI, so umbrella companies offering 80% take-home pay are likely to be tax avoidance schemes.
- Unusual payment arrangements, for example paying some earnings directly into your account
- Receiving more pay than specified on your payslip.
- Umbrella companies based outside of the UK
- Receiving ‘non-taxable’ sums of money. These could be described in any of the following ways: non-taxable loans, annuities, bonuses, shares, fiduciary receipts, credit facility, capital payments, advances. Remember, all employment income is subject to tax and national insurance deductions.
General advice –
Check Companies House for your umbrella company.
Check ‘Tax Avoidance – don’t get caught out’ here: https://taxavoidanceexplained.campaign.gov.uk/
Remember, you are responsible for your own tax affairs.
Check ‘information about known tax avoidance schemes’ here: https://www.gov.uk/government/publications/named-tax-avoidance-schemes-promoters-enablers-and-suppliers for an incomprehensive list of known tax avoidance schemes.
Green flags –
Your agency should provide you with a KID, a ‘Key Information Document’ – ask for one if not received.
Umbrella companies charging a set, fixed amount weekly or monthly, for example £15.
IR35 legislation will not apply to you if you are employed through an umbrella company.
[i] Brian Green, “Material concerns and labour pain: is construction facing a major crisis?” RIBA, https://www.ribaj.com/intelligence/materials-and-skills-shortages-in-construction 15 Nov 2021.
[ii] Ronan Lowney, quoted in Michelle Essen’s “Construction, tax and the general election,” Womble Bond Dickenson Insights, https://www.womblebonddickinson.com/uk/insights/articles-and-briefings/construction-tax-and-general-election 2 Dec 2019.
[iii] BIS Research Paper No. 145 “Supply Chain Analysis into the Construction industry: A Report for the Construction Industrial Strategy,” Department for Business Innovation & Skills, Oct 2013.
[iv] “HMRC keeps up investigations into tax evasion in labour supply chains,” Osborne Clarke, https://www.osborneclarke.com/insights/hmrc-keeps-investigations-tax-evasion-labour-supply-chains 13 Jul 2022.
[v] HM Revenue & Customs, Current list of named tax avoidance schemes, promoters, enablers and suppliers, https://www.gov.uk/government/publications/named-tax-avoidance-schemes-promoters-enablers-and-suppliers/current-list-of-named-tax-avoidance-schemes-promoters-enablers-and-suppliers#if-youre-involved-in-a-tax-avoidance-scheme updated 29 Sep 2022.
[vi] “VAT changes to affect supply chain,” RICS, https://www.rics.org/uk/news-insight/latest-news/news-opinion/vat-changes-to-affect-supply-chain/ 16 Sep 2019.
[vii] Nic Smith, “What is the Onshore Intermediaries Legislation,” IWORK, https://iwork.co.uk/agency-workers/what-is-the-onshore-intermediaries-legislation/ 7 Sep 2020.