The story of a client who was contacted by HMRC

The concept of an HMRC loan charge from payments from an Umbrella Company is likely something you haven’t encountered before, or maybe you just have and you need some advice. I have a client who came to us for help in 2018 – with her tax return with some letters from HMRC.  She is a social worker who was getting work via an Agency – and she was being paid by an Umbrella Company.  The lady isn’t British and took all the advice she received from the company at face value – after all, her Agency recommended the company to her.

What is an Umbrella Company?

An Umbrella Company generally employs agency contractors working on temporary contracts through a recruitment agency based in the UK. The company invoices to the recruitment agency or the client. Once the invoice is paid the contractor is paid through PAYE and is able to claim expenses for things like travel, food and accommodation. IR35 legislation has helped usher in more Umbrella Companies in the UK thanks to being able to assess employment status of contractors and take advantage of tax reliefs for smaller companies.

Being paid in ‘loans’ by an Umbrella Company means a higher tax rate

The Umbrella Company paid her a small salary but most of her pay was in the form of a succession of monthly ‘loans’. No tax was deducted from the loans and they said it was never to be repaid (therefore not really a loan).  HMRC wrote to her asking for details of ‘loans’ received since 2015 (the main reason for her coming to see us).  She had to pay tax on the loans and, if she didn’t agree to do so by April 2019, all the loans were to be taxed in her 2018/19 tax year resulting in very high taxable income for 2018/19 – meaning and most of the ‘loan’ income was charged at the Higher Rate tax rate of 40%.

How can this happen?

Umbrella Companies who act like this are very reassuring and make the loan system seem very normal – often saying that they are backed by advice from a QC which states that their payment methods are safely within the law and that any queries from HMRC will be handled.  But, when the crunch comes, their help and advice is pretty useless – in our client’s case they were still insisting there was nothing to worry about.  These sorts of Umbrella Companies generally give little detail on their websites and try to hook you into a telephone conversation with adverts that suggest they give returns of over 80%.  This is usually because there is only a small amount of tax and National Insurance deducted from a small salary – and the balance of the amounts deducted from pay is their fees. There was one Umbrella Company that offered an introducer’s fee of £500 to any worker that recommended another freelancer – which gives some idea of how much they make.

Don’t get caught out by being paid in ‘loans’ by an offshore company

In my client’s case, the Umbrella Company was registered in Malta – and I have seen a similar one based in the Isle of Man.  Any offshore Umbrella Company paying ‘loans’ to its workers does sound extremely dodgy to a worldly accountant or experienced UK freelancer, but to a naïve worker newly arrived in the UK, who is given a recommendation by their Agency, it can sound ‘normal’ – but will turn out to be an upsetting and costly mistake.