Ask AMS: Umbrella Companies and Loan Charges

By Anita Jaynes on 31 January, 2019

AMS is a Swindon-based accountancy practice, specialising in supporting SMEs and contractors. In this column, Peter Bromiley, partner at AMS discusses the dangers of using an Umbrella company which claims to give high take home pay  

Warning! Umbrella companies – loan charge from HMRC

I have a client who recently came to us for help 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 Umbrella Company at face value – after all, her Agency recommended the Umbrella Company to her.

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 have now written to her asking for details of ‘loans’ received since 2015 (the main reason for her coming to see us).  She now has to pay tax on the loans and, if she doesn’t agree to do so by April 2019, all the loans will be taxed in her 2018/19 tax year.  If that were to happen, then her taxable income for 2018/19 will be particularly large – and most of the ‘loan’ income will be charged at the Higher Rate tax rate of 40%.

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 are still insisting there is nothing to worry about until April 2019.  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 is one Umbrella Company that offers an introducer’s fee of £500 to any worker that recommends another freelancer – which gives some idea of how much they make.

In my new 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.

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