Umbrella companies are typically set up as a standard limited company who acts as an "employer" on behalf of its contractor employees. The usage of these companies can provide cost advantages and they've often been used to reduce IR35 liabilities.
However, the usage of these companies has proven controversial and many have claimed they unethically, or even illegally deprive the UK of tax revenues.
As IR35 rules were updated in April, many feared contractors and/or self-employed workers would be forced to operate through umbrella companies as swathes of private firms suddenly got hit by the legislation.
Generally, this notion has proven to be unpopular among contractors and multiple tax experts, public bodies and even MPs have called for the industry to be more regulated or abolished altogether.
These calls may ramp up once more as new insight from the BBC shows the UK is losing millions of pounds from certain schemes.
READ MORE: IR35 'is a blight on freelancers' - urgent review called for
Dave Chaplin, the CEO of ContractorCalculator, urged affected workers to fully understand what they're getting into if they're operating with an umbrella company.
He said: "These types of dodgy umbrella schemes have been running for years, yet HMRC has been unable to shut them down.
“Skimming by umbrella companies who deal in volume is one way they rake in millions, whether they are skimming from the taxman or from the contractor, by leveraging a lack of transparency, withholding holiday pay, or by various other mechanisms.
“Recently we have seen malpractice by umbrellas and agencies who ask contractors to indemnify the entire supply chain against tax loss before using their umbrella in conjunction with a non-disclosure agreement.
"They might as well say ‘if we don’t pay the taxman properly, you will owe them the money, and by the way, you can’t tell anyone what happened.’ And these firms are supposedly their employers.
“A skim of £20 per week can go unnoticed by contractors, and HMRC’s mantra of warning people to avoid ‘too good to be true’ schemes does not apply.
"A better slogan might be ‘if something looks dodgy, then it probably is’.
“The simplest option if operating ‘inside IR35’ is to go on the company or agency payroll. I would urge anyone who uses an umbrella scheme to make sure you understand how they are supposed to work, and don’t work for one unless you do.”
Crawford Temple, the CEO of Professional Passport, reflected on the actions taken by HMRC thus far and commented on why the use of Philipine actors is so prevalent.
He concluded: “HMRC has issued specific ‘Spotlight’ updates on mini umbrellas so is fully aware of the schemes but we have seen no visible enforcement and the explosion of these schemes has been fuelled by the introduction of the Off-Payroll working rules.
“In the latest update to the rules, HMRC has amended the debt transfer rules so that these fee payer debts can now be passed up the supply chain. I believe that this change was made because of the challenges HMRC was facing in securing tax shortfalls from the fee payers. However, relying on legislation updates simply will not work. A proactive approach to visible enforcement needs to happen.
“When Off-Payroll working was introduced to the public sector in 2017, HMRC was warned that limiting the recovery of tax from the fee payer would lead to many forms of abuse.
"And so it is playing out as predicted. The likely reason why the Philippines is being used in this instance is because there is no double taxation treaty between the UK and the Philippines which makes it harder for HMRC to recover any unpaid taxes.”
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