It’s easy to see why your contractors might want to use an offshore umbrella company. A quick Google search will show you a number of companies, eager to offer very high figures for take-home pay, and it’s difficult to argue with someone who just wants to take home as much money as possible. However, offshore umbrella companies represent a risk to you and your contractors, it’s a bad idea to get involved with them and in this article, we’ll explain why.
What we mean by an offshore umbrella company
When we talk about the risks of involvement with offshore umbrella companies, we specifically mean a company who employ or engage UK contractors for work in the UK, but base themselves outside the UK to achieve a tax advantage.
We’re not talking about international umbrella companies, who allow UK contractors to work abroad while remaining compliant with UK and local rules.
Why offshore umbrellas are bad for your contractors
The main reason using an offshore umbrella company is bad for contractors is that they don’t actually achieve what they claim. If your contractors live and work in the UK, they have to pay UK tax and National Insurance.
Using an offshore umbrella will not reduce your contractors’ tax liability, but it will mean they don’t pay the right amount of tax and NI. At some point HMRC will investigate and they will have to pay all the tax they “avoided”, often with added interest and penalties for late payment.
It also means they’re employed by a company who don’t have their best interests at heart and are willing to mislead them for profit – which could obviously lead to a huge variety of other problems.
Why offshore umbrella companies are bad for recruiters
Given how bad they can be for your contractors, it should be obvious that offshore umbrella companies are bad for recruiters as well. The last thing you need is for your contractors to receive life-changing tax bills in connection with their work for you, particularly if they hold your agency responsible, but you could also be liable for any unpaid tax and NI:
Government guidance states:
“You may be liable to pay any unpaid Income Tax and National Insurance contributions resulting from the use of a tax avoidance scheme involving an offshore umbrella company.
You should be mindful that some offshore umbrella companies take steps to disguise the fact that they are operating offshore by using a UK based company to contract with agencies.
You are responsible for any unpaid Income Tax and National Insurance contributions even if you are not aware that there is an offshore umbrella company in the supply chain.”
If your contractors are currently with an offshore umbrella company
If your contractors are already with an offshore umbrella, it’s important to disengage as quickly as possible. Our advice is to select a compliant UK umbrella company and get your contractors to transfer as soon as possible.
This could result in your contractors taking home less money, so you may see some resistance. The change is genuinely in their best interests and it’s important that they understand what’s happening and why. You may also want to involve a tax expert to advise your contractors what to do about any tax they’ve already underpaid.
If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.