How to spot a tax avoidance scheme

The following examples are warning signs of tax avoidance schemes.

A short or brief employment contract or not being given a contract at all

If you receive a short contract with minimal detail, this could signify a tax avoidance scheme or non-compliance with other employment regulations. Also, be cautious of contracts that cannot be easily accessed, printed or saved. Always keep a copy of your employment contract for the future.

Umbrella companies offering higher take-home pay

Many non-compliant umbrella companies will advertise higher rates of take-home pay, such as 80% or higher. Always remember that the basic rate of income tax is 20%, and National Insurance Contributions are also due on all salaries. Therefore, an 80% take-home pay rate is most likely a tax avoidance scheme.

Unusual payment methods

Tax avoidance schemes often use unusual payment methods from separate entities or are made as different payments. For example, you may be paid one amount under PAYE (usually a national minimum wage amount), and the other part of your earnings will be paid as a loan or other non-taxable payment – often from a third party. These unusual payment methods may not appear on your payslip as they only show money paid through PAYE to make it appear compliant with HMRC. However, all payments should be paid together and shown on your payslip, and all taxes should be accounted for and paid to HMRC.

The umbrella company is based outside of the UK

Not all, but many, tax avoidance schemes are based offshore. Always check addresses used on the website, correspondence or contracts to determine where they are based. You can also find the details of companies and the directors on Companies House. If they do not appear in the search results, they may be based overseas, or the directors may not be UK residents.

The umbrella company has been allocated an SRN

An SRN is a number HMRC allocates to a tax avoidance scheme when they reasonably suspect it is notifiable or if it has been disclosed to them. It helps HMRC track scheme users.

Useful government resources

The government has released a list of current named tax avoidance schemes, promoters, enablers, and suppliers for you to look out for. Please bear in mind that if a tax avoidance scheme is not on the list, it does not mean that HMRC approves it or that it works. Always be diligent and on the lookout for the signs of a tax avoidance scheme!

The following guidance and resources about tax avoidance are also available on the government’s website:

• Spotlight 60 – information about tax avoidance arrangements used by some umbrella companies
• Spotlight 55 – information about what you should think about before using an umbrella company to make sure it follows tax rules
• Ten things a promoter of tax avoidance schemes will not always tell you – guidance and information about the risks of engaging with a tax avoidance scheme that a promoter will not tell you
• Guidance on what is meant by the term ‘contractor’ and information about employment status
• Information about how to identify schemes that wrongly claim to increase your take-home pay if you are an agency worker or contractor

If you think you might be using a tax avoidance scheme, please get in touch with HMRC as soon as possible. They will offer support and advice to help you escape the tax avoidance scheme and settle your tax affairs.

If you think you have previously used a tax avoidance scheme but are no longer using it, you still need to contact HMRC. By contacting HMRC to settle your tax affairs, you may be able to arrange a manageable payment plan, and it could also mean that you do not face a more significant tax liability if the scheme you used is taken to tribunal.