Umbrella companies which employ workers directly and then invoice businesses for work undertaken have been a recent target for HMRC’s payroll tax investigation unit. Although many umbrella companies operate legitimately, HMRC maintains that many have not been paying sufficient taxes because of the way they manipulate payroll tax.

In 2016, new legislation was brought in to address the problems caused when businesses used workers from umbrella companies to supplement their workforce.  Some umbrella companies treat workers as self-employed, often paying minimum wages and then supplementing each person’s income with travel and subsistence allowances. This has had the effect of reducing the tax collected by HMRC. The 2016 legislation treats workers from umbrella companies as employed by the business for whom they are working, and the location where they work as their ‘normal’ workplace.

By restricting travel and subsistence allowance paid by umbrella companies, HMRC has been able to collect £705m in additional tax. Of this, SMEs paid £322m while large businesses paid £383m. The accountancy profession, while accepting that tax avoidance is one of HMRC’s target areas, noted that the difference between the amounts raised from SMEs and larger businesses was very similar. This has led to queries about how HMRC is allocating its resources and criticisms that smaller businesses are being targeted rather than bigger companies with more complex tax affairs.

Whatever HMRC’s strategy in targeting tax avoidance, tax professionals used HMRC’s report on umbrella companies and the amount of extra tax raised as a reason to remind their clients that the best way to avoid an investigation is to keep their tax affairs in order.