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HMRC Cracking Down on Payroll Tax Dodging Through Umbrella Companies

Written by: Keith Tully

Published: 24th February 2016

Dodging taxHM Revenue & Customs (HMRC) has been busily clamping down on processes through which British companies avoiding paying payroll taxes via umbrella companies.

In fact, new research into the subject from the law firm Pinsent Masons has revealed that HMRC was able to collect more than £500 million during the 2014 to 2015 tax year from their investigations into payroll tax abuse.

According to the law firm, much of the money collected in this context by the tax authorities in that 12-month period related to the attempted use of umbrella companies as a means of reducing payroll tax liabilities.

HMRC has apparently been clamping down particularly on the direct employment of contract workers by umbrella companies who then reduce their payroll tax bills by paying low wages that are routinely topped up by generous subsistence and travel allowance payments.

By operating in this way, employers can potentially save very notable sums of money on an annual basis in payroll taxes and National Insurance contributions.

But while HMRC has been keen to discourage scenarios in which umbrella companies are seeming to pay lower wages than in fact they are to their workforces, there remains some debate about how right or wrong these practices really are.

“The Revenue [HMRC] has been clamping down hard on companies operating these schemes and their efforts are now bearing fruit,” said Fiona Fernie, partner and head of tax investigations at Pinsent Masons.

“However, whilst there has undoubtedly been abuse going on, many perfectly legitimate companies and contractors are also being caught in the crossfire, with the result that the entire industry now faces a bleak future.

“The increased scrutiny from the Revenue, alongside new restrictions coming into force this year, will make it extremely difficult for all umbrella companies - even those operating within the law - to function.”

In addition to payroll tax avoidance, HMRC has been working to discourage and punish tax avoidance more generally through the increased use of its controversial Accelerated Payment Notices (APNs).

According to HMRC, it has already managed to recover as much as £2 billion from disputed tax and tax avoidance cases through APNs since they were first used in 2014. 

Keith Tully

Keith Tully

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Keith has been involved in Business Rescue since 1992, during which time he’s worked for both independent and national firms. His specialties include company restructuring matters and negotiating with HMRC on his clients behalf.

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