Originally posted by Churchill
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jayshah9 the way umbrellas work is that they get a dispensation from HMRC to allow people to claim a certain amount, in theory this saves a load of paperwork. One of the conditions of this dispensation is that they don't have to check every claim but they are required to audit a selection of the claims and make sure that the claims are backed up by receipts.
The reality is that umbrellas all pay you exactly the same amount of money out of your gross income. This means that the only way they can really sell their services is based on how generous their expenses dispensation is and encourage people to claim right up to the limit of the dispensation. While people are supposed to have receipts for all this, it's all done on a nudge and a wink. Outwardly they have to make a big noise about keeping receipts to keep HMRC happy but just quietly they don't check and they allow (or even quietly encourage) people to abuse the dispensation right up to the limit to reduce tax.
So, what would happen if the umbrella did decide to audit you? Umbrellas will be forced to deny all this (they would, wouldn't they) but here's my take on what might happen:
1. They might just give the worker a warning and still allow the expenses anyway because, hey it was a genuine mistake.
Don't do it again.2. They may disallow the expenses and the worker would have to pay the tax as if they had never claimed them (and they probably didn't exist anyway so no loss).
3. They may report the worker to HMRC for investigation and the worker could turn on the umbrella and tell HMRC that systematic abuse of the expenses dispensation was widespread and they were actively encouraged to do it, though always in a way that could be subsequently denied by the umbrella. This would cause a load of grief for the umbrella and they won't want that. The worker may have to repay the tax, possibly plus interest and penalties. They umbrella may be investigated and lose their dispensation which which would destroy their business almost instantly.
Although they feel the need to rattle their sabres at times, I think HMRC is quietly tolerating umbrellas and their dispensations. Why? Because it keeps a very large number of problematic freelance/self employed workers working under the umbrella system so they can keep an eye on them. If it weren't for umbrella companies then they would scatter every which way and a large number of them would go and form limited companies (and claim all sorts of stuff). This would be very hard to police because they are all separate entities and would have to be investigated individually which would take a lot of resources.
Umbrellas attract people away from running a LTD company which means the umbrella does most of the admin and HMRC can audit a handful of umbrellas from time to time rather than 100s of thousands of workers who are self employed or running LTD companies. The compromise from HMRC is to allow umbrellas a generous dispensation to encourage not to set up as LTD/Self Employed.
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