Tech contractor who uses an umbrella company? UK tax is coming after them
Britain's wallet-checkers suspect VAT avoidance from some of them – to the tune of 10,000-case tribunal backlog
Britain's tax collection agency is clamping down on umbrella companies used by contractors to pay their dues, with 10,000 outstanding tribunal cases waiting to be heard.
This is according to legal eagles at Pinsent Mason, which says the number of specific instances shot up sevenfold in the 12 months from the 1,200 registered at the end of June 2021.
"With a large number of umbrella companies suspected of VAT avoidance, the tax tribunal backlog has grown massively in a very short time," Steven Porter, a partner at the law firm said in a statement to The Register.
"Contractors looking to sign up with an umbrella company should be aware that it is likely the umbrella company will be required to pay VAT. HMRC will view any claims to the contrary with suspicion," he added.
The government's introduction of IR35 tax reforms in the private sector in April 2021 made businesses that use freelancers responsible for the tax their contractors should pay. In turn, this has resulted in a massive increase in the use of umbrella companies by freelancers, including tech hands-for-hire.
Using an umbrella company gives contractors the option of having an employer that takes care of tax returns, etc while still having some flexibility to work on a contracted basis.
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"HMRC (His Majesty's Revenue & Customs) and the tribunal are aiming to clear the backlog of tribunal cases quickly – HMRC are confident that they will win and move on to collecting the VAT it believes it is owed," said Porter.
"HMRC sees the tax affairs of contractors as an area where it is missing out on a lot of unpaid tax. Umbrella companies are firmly in its crosshairs," he added.
IR35 has been one of the most emotive subjects for Reg readers in recent years, as they are forced to pay tax like other full-time employees yet do not incur the same benefits such as holiday or sick pay.
It hasn't helped that despite making the rules, some government departments have not been able to get the reformed rules right themselves, with NHS Digital and Defra among the names being forced to settle bills for unpaid tax just last month.
A spokesperson at HMRC told us:
"We are using our civil and criminal powers to challenge those involved in Mini Umbrella Company (MUC) fraud, including deregistering tens of thousands of MUCs who we believe were exploiting the VAT Flat Rate Scheme and removing their access to the Employment Allowance.
"We have made a number of arrests in relation to MUC fraud and also taken steps to recover input tax in cases where it is established that a business in the supply chain knew, or should have known, there was fraud." ®