The government may not actively endorse umbrella companies, but they have recently released some helpful guidance online for temporary workers, recruitment agencies and businesses that engage with contractors and freelancers. The latest guidance (released in October 2021) is written for recruitment agencies and firms that use temporary workers and is designed to help decision-makers avoid non-compliant umbrella companies. This guidance is beneficial, and we recommend you give our blog a read – whether you’re a staffing agency or work through one.
Overview
The government has released new guidance for recruitment agencies and businesses that engage with temporary workers. The guidance explains the risks of engaging with non-compliant umbrella companies, including the extensive damage such a mistake could cause (including reputational and financial harm). The government has also explained how some non-compliant umbrella companies operate, such as disguised remuneration schemes. Keep reading, and we summarise the government guidance. If you want to read the original content, please visit: Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme.
How agencies and businesses can become involved with tax avoidance
Unfortunately, while most umbrella companies are compliant and abide by UK tax law, some break the rules and are non-compliant. There have been cases where some non-compliant umbrella companies operate PAYE on a small fraction of their workers’ pay and then treat the rest of the salary as non-taxable (thus not subjected to PAYE, resulting in higher pay retention). The most common types of untaxed payments are:
- Loans
- Grants
- Salary advances
- Capital payments
- Credit facilities
- Annuities
- Profit shares
- Shares and bonuses
- Amounts held in a fiduciary capacity
Any umbrella company that processes payroll by using any of the above is operating non-compliantly and is deliberately inflating its employees’ pay retention. If a recruitment agency or business working with temporary staff engages with such an umbrella, they become part of the supply chain.
The potential consequences your agency or business could face if you refer temps to non-compliant umbrella companies
HMRC has a good track record when it comes to going after and taking down non-compliant umbrella companies. If one of your workers engages with a non-compliant umbrella company, you will put yourself, your colleagues and your business at risk of:
- Tax Compliance Checks
- Penalties
- Tax Liabilities
The damage that non-compliant referrals could do to your business is also a severe threat, and there could be no bouncing back.
Enabling tax avoidance – the penalties
You could be punished as an enabler of tax avoidance if any of your workers engage with a non-compliant umbrella company. The government confirm:
“If you enter into a contract with and make payments to an umbrella company operating an abusive tax avoidance scheme, you may have enabled the use of that arrangement.
The penalty is 100% of the fees receivable in consideration for any actions taken by you which enabled the arrangements. If you receive an enabler penalty, HMRC may also be able to publish your details, which will publicly identify you as an enabler of defeated tax avoidance.”
Income tax and NIC liability
If you place workers who operate offshore, you are required to process Pay As You Earn (PAYE) on payments that are sent to an umbrella company (assuming it’s an offshore umbrella). This is part of the offshore employment intermediaries rules. They apply to agencies placing workers with a hirer and to hirers where there is no UK based recruitment agency in the supply chain.
The government guidance states:
“This means 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.”
Reputational damage
It goes without saying – engage with non-compliant umbrella companies and make dodgy referrals, and your business could suffer as a result. You could damage existing relationships, miss out on upcoming opportunities, and worst of all, risk going out of business altogether.
Helpful steps to protect your business from non-compliant umbrella companies
The new guidance from the government includes several steps that recruitment agencies and businesses can take to protect themselves from the risks associated with non-compliant umbrella companies. We’ve summarised these below and have added some suggestions of our own.
Supply chain management
You must have a trustworthy supply chain in place. Make sure you conduct strict due diligence on every business that is currently in your supply chain. Also, make sure any further supply chain additions are fully vetted too.
Understand your responsibilities
When engaging with temporary workers, there are many regulations to consider – whether you’re a staffing agency or an end client that hires temps. You must read up on the latest rules and regulations to ensure you remain compliant with HMRC. We highly recommend you engage with legal experts and frequently visit the government’s website for updates.
Review your contracts
You may be interested in reviewing your contracts with umbrella companies to ensure they’re above board. The government suggest you request example payslips from umbrella companies – to ensure they’re compliant. They also recommend you ask for evidence of PAYE returns, and you ask “directors to indemnify you against tax liabilities if they do not operate PAYE on the full amount received by the worker.” Finally, the government make one more suggestion – ask the umbrella company for “your authorisation before further sub-contracting to a third party.”
Checking payslips
As mentioned in the point above, you must check all umbrella company payslips to ensure the correct tax and National Insurance Contributions are being made to HMRC on your workers’ behalf.
Be careful if you engage with offshore umbrella companies
You should be extremely cautious if you choose to engage with umbrella companies that are based offshore. Also, if you come across an umbrella offering financial incentives to your workforce, this should be investigated too (as it could be a sign of a non-compliant umbrella company).
Check Companies House
It’s a good idea to only engage with umbrella companies that have been trading for a decent period. Look them up on Companies House and conduct a quick review. Can you trust the umbrella company? Do they have a good trading history? Are the directors based in the UK? Recently, Giant Pay suffered a severe security threat due to suspected umbrella company cloning. This is something else you should check on Companies House – that the umbrella company you’re considering referring to is definitely the right company.
Make sure your workforce is up to speed
Your employees need to be up to date on the risks that apply should you ever make a non-compliant referral. Educate your staff, conduct regular training, and work closely with professional bodies in the industry.
Only use umbrella companies that have a professional accreditation
This is our recommendation, not the governments. However, we strongly recommend you only consider referring candidates to an umbrella company that is accredited by either the FCSA or Professional Passport. These are the two most respected professional bodies in the UK that are committed to ensuring the supply chain of temporary workers is compliant with UK tax rules and regulations. Recently, we wrote a blog on a bogus umbrella company accreditation that we believe was set up by either criminals or non-compliant umbrella companies. It’s essential you trust the companies you refer temporary candidates to.
Constantly review your Preferred Supplier List (PSL)
Once an umbrella company makes it onto your PSL, that shouldn’t indicate the end of the road for compliance checks. You need to undertake regular updates and audits to ensure the umbrella companies that feature on your PSL remain compliant and continue to provide dependable payroll services for your temporary workers.
Report suspicious activity
If you ever come across a non-compliant umbrella company, the government urges you to report them immediately. You can contact HMRC here.
Top 10 umbrella companies
Are you looking for an umbrella company discount from a provider you can trust? If you are, you’ve come to the right place. We have collated a list of top 10 umbrella companies, and they’re all accredited by either the Freelancer and Contractor Services Association (FCSA) or Professional Passport. And, some have special offers at the moment that are well worth checking out!
