As we mentioned before Christmas, the UK government is closing one of the tax loopholes used by Umbrella Companies to save their customers money, specifically those concerning offshore Employee Benefit Trusts (or EBTs). As a result the tax benefits of EBTs existing offshore will be removed, meaning the customers of Umbrella Companies using such schemes will lose out. We are aware of ten UK Umbrella Companies operating offshore EBTs currently, serving several thousand clients. This is a huge change and will affect many UK freelancers, contractors and small businesses when the new rules pass into law in April this year.

It would seem many of these customers have sensed danger and are looking elsewhere for their accountancy needs – and we’re pleased to say a great many of them are choosing Crunch! Our advisors saw a record number of calls from people looking to switch from Umbrella Companies last month, many of whom weren’t even affected by the EBT issue, but had chosen to switch anyway, fearful of suffering a similar fate should new, tougher legislation be introduced in the future (which, given the government’s current clamour for cash, is entirely likely).

A recent horror story involving Umbrella Companies has seen two practitioners forced into liquidation. Sunday Solutions and Bradbury & Co both ran schemes where they offered clients (mostly IT contractors) Limited Liability Partnerships. These umbrella schemes perform a ‘middle man’ service where they withhold the taxable pay from the individual contractor, and then pay those taxes on their behalf.

It’s easy to see why contractors would be attracted to such arrangements. You get your take home pay while they look after your tax concerns (albeit for a fee); the problem is that if taxes do go unpaid, it is the individual contractor who will be ultimately held responsible. And that’s exactly what happened in this scenario.

Sunday Solutions and Bradbury & Co. handled an estimated £80m for their 1,500 clients, yet none of that money ended up in the hands of the taxman, according to the insolvency company. By the way, these LLPs weren’t even registered with Companies House and were charging excessive fees which in many cases amounted to 30% of earnings.

To make matters worse, the contractors were then liable to pay the tax owed despite the fact they’d had their taxable pay already held by the Umbrella Company. In effect, they were being asked to pay their taxes twice over.

For an insight into how the problem has been affecting people, check out the Contractor UK message board which homes the ultimate thread on the issue. Access it via this link.

If you’re using an Umbrella Company and are concerned you could be operating more tax-efficiently, or simply wondering what your options are, why not give our advisors a call and find out why so many of your compatriots are choosing to sign up with us?