All eyes might be on chancellor Jeremy Hunt ahead of Spring Budget next Wednesday but it was his ministerial colleague Grant Shapps, in December 2022, who revealed the government’s plans to introduce a Single Enforcement Body (SEB) have been put on the back burner.
What was the Single Enforcement Body, and why does it matter?
The SEB was a vital component of the employment bill put forward by former prime minister, Boris Johnson. It would have been fundamental in clamping down on rogue employers and, in turn, non-compliant umbrella companies.
The Single Enforcement Body still may materialise, but for now, it’s been deprioritised. As such, there’s little to suggest that the government has immediate plans to stop tax avoidance schemes from operating under the guise of compliant umbrella companies – an issue that continues to threaten contractors and other flexible workers.
This wasn’t the result that compliant umbrella companies — of which there are many — wanted. At Parasol, we’ve been urging the government to deliver on its promise to regulate this vital industry and it’s a promise that was made back in 2017. Today, in 2023, we’d still like it kept.
What does a deprioritised SEB mean for temporary and flexible workers?
In short, with no SEB so far emerging, these workers must continue to conduct their own ‘due diligence’ before entering into a contract of employment with an umbrella company.
The onus falls on the individual to ensure they aren’t lured into operating via a tax avoidance scheme which.
What to ask your next umbrella as a minimum…
Here are four key questions to ask your next umbrella company:
1. How much take-home pay will I receive?
The amount you’ll receive after all tax deductions and fees depends on your income tax band. There are many benefits to umbrella working, however, promises of sky-high take-home after tax — in the region of 80 to 90% — are unrealistic.
Bear in mind that the basic rate of Income Tax is 20%. Then, on top of this, National Insurance Contributions (NICs) must be factored in. So, promises of anything above 80% could well indicate tax avoidance.
2. How does the payment process work?
Be wary of convoluted payment processes.
Tax avoidance schemes often pay workers a low salary, with the rest of the income topped up via a loan; payment from a trust, grant, profit share or salary advance. The scheme will wrongly claim this method legally avoids income tax.
3. How will my payments be broken down?
As a follow-on to the above point, before signing any contract, you should be provided with a Key Information Document (KID) by the recruitment agency placing you in the role.
A KID will break down the payment, identifying all deductions and fees, to give you clarity about how much money you’ll take home.
If you don’t receive a comprehensive KID – or you do, but it fails to outline specific deductions clearly – it could be a sign that a tax avoidance scheme is involved.
4. Are you HMRC approved?
The answer you’re looking for here is ‘no’.
HMRC doesn’t approve or certify compliant umbrella companies. However, this assurance may materialise in time, if and when the industry is regulated.
However, lots of tax avoidance schemes advertise themselves as ‘HMRC approved.’ Claiming to be ‘100% compliant’ is another red flag. Either a business is compliant or isn’t – there’s no in-between.
An important point is that tax avoidance schemes account for a small percentage of the umbrella market. However, the risks of unsuspectingly operating through one of these companies are significant, with the worker often pursued by HMRC for outstanding taxes which should have been paid.
Taking this into account, and the fact that the government is no closer to regulating the umbrella industry, flexible workers are advised to carry out their own checks by posing the above fundamental four as a minimum.
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