By Ben Chernoff, Director at Davis Grant
Employment organisations and tax experts are issuing warnings over the use of so-called ‘mini-umbrella’ companies, which have been linked to fraudulent tax activities and the abuse of workers’ rights.
Many freelancers and contractors have turned to umbrella companies as a result of the new IR35 rules, in many cases relying on them to process their payroll as an employer would.
More than 600,000 temporary workers in the UK are employed through an umbrella company, with many offering an effective and legitimate service to freelancers, contractors and recruitment agencies.
However, there are now concerns that unscrupulous ‘mini-umbrella’ companies are being used to misappropriate billions of pounds in unpaid wages and tax fraud.
A Guardian investigation into the ‘mini-umbrella companies’ used to recruit freelancers for the Government’s pandemic test-and-trace system found that although people had been hired to work for the likes of Serco, a complex network of opaque smaller companies, often fronted by overseas directors, had led to contractors losing out.
The newspaper found that some people had been repeatedly placed on an emergency tax code so that they were charged more tax than they owed and had to reclaim it at the end of the year, while some staff reported problems with obtaining holiday pay that they were due.
Separate research, cited by the Guardian, indicates that umbrella companies have been estimated to withhold holiday pay worth £2.5 billion a year from some workers and agencies.
This typically occurs where workers do not actively claim holiday pay before the end of a tax year, meaning that it is often then claimed by the umbrella companies rather than workers themselves.
While there are many effective and fair umbrella companies in operation, this latest report should stand as a warning to agencies to ensure those they recruit are paid fairly via third parties. If you need advice on umbrella companies, please contact us.