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Recommendations on working with umbrella companies
by Susie Hughes at 11:57 20/04/22 (News on Business)
Umbrella companies often play a key part in recruitment supply chains. Working with a non-compliant umbrella, as highlighted by the recent Government call for evidence concerning the umbrella company market, can expose a recruitment business to significant risk.
So, bearing in mind that the Government is not now likely to include new legislation regulating the sector for some time, how do you decide which umbrella company to work with, and what steps can you take to protect against what could turn out to be a significant negative?

Theresa Mimnagh from the recruitment and employment law specialists, Lawspeed, takes a closer look at

She writes:

To understand the risks it is necessary to understand the benefits of working with umbrella companies. The proposition is simple, the umbrella rather than a hirer or recruitment business (agency) employs (or engages) the worker. This saves either from having to operate payroll for the worker, thus avoiding the admin overhead in dealing with PAYE. It also reduces the risk of a claim by the worker for under payment of wages or for employment rights as against any other party in the chain of supply. On the face of it the service is compelling.

Now to the risks. HMRC’s guidance published in October 2021 “Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme”, explains the tax risk to anyone involved in the supply chain. It identifies the indicators of what HMRC refers to as ‘disguised remuneration schemes’.

These are primarily arrangements where payments due to the worker are not made under a normal PAYE scheme by the employer, but are instead made under some other kind of scheme designed to avoid tax or NICs. There is a plethora of tax law around this including MSC legislation which HMRC has recently dusted off and Recruiter magazine has reported is now being applied.

Wherever there are underpaid levels of tax a serious risk arises, given that tax law often entitles HMRC to go after the umbrella company and possibly its directors as well as any agency or hirer that is involved, in some cases making their directors also liable. In addition, HMRC points to the risk of reputational damage given that HMRC has a policy to publish details of those that are penalised.

In identifying steps that can be taken to avoid this category of risk, HMRC makes some obvious suggestions. For example, it recommends conducting due diligence on the entire supply chain. Of note is that it recommends considering inclusion of some specific contractual terms in the contract with the umbrella company:

  • obligations to provide requested information including payslips, RTI returns and other compliance information;
  • an indemnity from the umbrella company against tax liabilities that arise if PAYE is not applied correctly, and a director’s guarantee;
  • a limit on the ability of the umbrella company to sub-contract its obligations to a third party.

These are sensible commercial steps for an agency or hirer to take, and steps that we at Lawspeed have long advocated but which are often resisted by those in the sector. Indeed some readers may recall that our advice about the inclusion of indemnities and a directors guarantee (mirrored in the templates we provide) in 2016, was met by vigorous objection from some umbrella company representatives.

HMRC’s view, in now promoting this provision, is that such an indemnity and guarantee is entirely reasonable – after all, the directors will always know what payment arrangements are actually in place. Directors of compliant umbrella companies should have nothing to fear, and there is no better deterrent for those thinking of a risk laden or non compliant route.

Non-tax risks
Whilst HMRC has it focus on tax compliance, there are other non-tax risks to consider. For example: the risk of claims for underpaid holiday pay, a live issue regularly mentioned in the press.

Similarly, claims for employment rights by workers, have been threatened by disgruntled contractors since imposition of the latest IR35 rules.

Claims such as these are often made by the worker against all parties in the chain of supply, leaving a supplying agency or hirer with not only a potential legal and/or compensation bill to pay, but also loss of reputation and goodwill.

Add to this the risk of claims for unlawful deduction from wages, arising directly from the procedures the umbrella company may have set up. Albeit in these cases the claim would usually only be against the umbrella company, there can easily be spill over affecting the agency or hirer who may have recommended the umbrella company. All these areas of risk can be induced by incorrect contracts and/or inappropriate arrangements between the worker and umbrella company, and indeed the agency/hirer and the umbrella company.

The solution in every case is down to the right contract and due diligence:

  • insist on using a contract that addresses all the risks. This will be different from a simple company contract and should contain suitable indemnities and director guarantees. Remember that the contract is your most important document – depending on your vigilance in getting the terms right it can either save the day or let you down if a problem arises
  • the contract should always be supported by thoroughly checking the arrangements that the umbrella company has in place ahead of the engagement – don’t leave it too late. Ideally, use an independent audit rather than relying upon trade membership (where there may be a conflict) or promises of compliance (noting that all umbrellas claim compliance but, given the evidence in some cases, not all claims are correct)
  • keep an eye out for arrangements with third parties, whether group companies or otherwise. Use of third parties could imply a scheme of some kind and using third parties is at the heart of the mini umbrella scandal, hence HMRC’s recommendation about limiting sub-contracting and, we would add, assignment
  • remain attentive in ensuring that payments are being processed correctly.

With HMRC’s guidance in mind and all these steps adopted, those taking advantage of umbrella services should be able to rest easy.

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Susie Hughes © Shout99 2022

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