The Government has been consulting on greater regulation of umbrella companies to address its concerns over tax avoidance and exploitation of workers’ rights in the flexible labour market.
Some legitimate points have been raised about employment agencies’ use of umbrella companies, but it is important to recognise that umbrella companies do play a useful role in the labour market. Therefore, a blanket prohibition or regulation that would make them redundant, would not be good for businesses at a time when the need for flexible labour and cost management has never been greater.
The consultation posed more than 60 questions, but essentially the key ideas being put forward are:
- Mandating due diligence by either the employment agency or end user client,
- Transfer of any tax and NIC unpaid by the umbrella company to the employment agency or end user client, and/or
- Worker payrolls to be operated by the employment agency where an umbrella company is used.
Each of these options would bring higher administrative burdens for employment agencies, in particular option three would effectively make the concept of an umbrella company handling the employment administration of agency workers redundant.
A simpler option
Many umbrella companies already seek accreditation by industry bodies because they recognise the commercial benefits. Indeed, a significant part of the labour supply market has an expectation that an umbrella company has some accreditation. By formally recognising accreditation, perhaps through the Freelancer and Contractor Services Association (FCSA) or even a new scheme operated by the Employment Agency Standards Inspectorate, HMRC compliance activity could then be better focused on the non-accredited umbrella companies. It would also give employment agencies and end user companies a clear quality indicator.
Sadly, with the recent trend of “outsourcing” tax administration to taxpayers, we are perhaps unlikely to see the Government invest effort in an accreditation process for umbrella companies. So it seems likely that the administrative costs of using agency workers will increase in the future.
Protecting your business
In the meantime, businesses using agency workers should step up their supplier diligence to protect themselves from the potential implications of using workers connected to unscrupulous umbrella companies – here are 10 key warning signs:
- Workers are promised increased net pay if they work through that umbrella
The only way that a worker can be paid more with a particular umbrella is if that umbrella charges less (its margin) or if it isn’t fulfilling its tax obligations properly. If it’s the former, ask how they can provide the same level of service, compliantly, than all other similar businesses.
- The worker has no choice but to work through certain umbrellas
This may be because the engager or agency has undertaken an assessment of suppliers and only wants workers who are able to work via their preferred suppliers. However, it might also be that the agency or their consultants are receiving a cash incentive for placing that worker through that particular umbrella and do so without undertaking proper due diligence.
- Payslips are incomprehensible
Unless you can clearly understand the trail between your workers’ agreed rate and the net pay they receive after any deductions, steer clear – particularly if the payslip shows unusually low levels of tax/NIC or different categories of taxable/non-taxable pay that cannot be explained.
- The workers are employed by one entity but paid by another
Why are they being paid by someone who isn’t their employer? This might be indicative of a tax avoidance scheme or of historic compliance issues.
- Employees can claim expenses tax free without the need to keep comprehensive records
There are limited circumstances where umbrella employees can claim tax free expenses. All of these require records to be kept and checked, at least periodically, by the employer, so any umbrella claiming that tax-free expenses can be paid without records being kept is likely to be operating non-compliantly.
- The umbrella company website has no real detail to it, no contact names, numbers or address
It might indicate a new or very small business or just one that isn’t very good at managing its own web presence. Any business that employs people might be expected to have some substance behind it including alternative contact details, some detail on the senior management, their history and experience and maybe even useful documents and FAQs. If they don’t list their address, ask why.
- The umbrella management/directors/shareholders have been involved in similar businesses that no longer trade
A quick and free search at Companies House will provide a list of the shareholders and directors and you can view their prior records by clicking on their name. If that shows a long list of short-lived businesses or the information contradicts what they are telling you or showing on their website, ask more questions.
- The umbrella claims to employ thousands of workers but operates from a private address, an office above a corner shop or only lists a registered office
Not every business needs a flagship head office but do their business premises support what you are being told about the business?
- The umbrella holds no form of industry accreditation such as FCSA or Professional Passport
If they have been trading for any length of time and reached any reasonable size, an umbrella business without some form of independent accreditation should raise alarm bells.
- When you ask anything other than basic questions, they provide vague answers
You really ought not to have thought of any questions that an experienced umbrella hasn’t been asked many times before. If they can’t answer the questions easily and quickly or refuse to answer the questions or provide supporting information when asked politely, walk away.
In short, make sure you know who you are engaging with. Besides the employment tax implications of getting it wrong, which may increase if the debt transfer proposals are enacted, all businesses have an obligation to know who is in their supply chains under the Criminal Finance Act.
Rob Woodward is an associate director in the global employer services team at BDO