Employment businesses, or “recruitment agencies”, often collaborate with umbrella companies as a means of providing temporary labour for their clients. The umbrella company acts as employer to the agency’s workers and deals with their tax and national insurance.
Perhaps due to the complexity of the contract arrangements and the distance from the end user, or in some cases their offshore status, some umbrella companies fail to comply with UK requirements on tax obligations and payroll.
In an attempt to address this, HMRC has outlined what steps organisations must take to prevent
non-compliant umbrella companies from participating in the labour market. Although this guidance is primarily directed at recruitment agencies, it is also applicable to the end user clients. Any business which is engaging with an umbrella company must now put adequate measures in place to safeguard the labour supply chain against non-compliance.
The guidance covers:
- the employment and tax laws to which employment businesses need to adhere when they partner with umbrella companies to supply workers for their clients. It offers guidance on how they can assist workers by detailing how the employment arrangement with the umbrella company will function, being transparent about pay rates, and fulfilling their duty to provide a key information document;
- the repercussions employment businesses might encounter if bodies like HMRC, the Employment Agency Standards Inspectorate or the Gangmasters and Labour Abuse Authority discover their involvement in a non-compliant supply chain; and
- the measures employment businesses can take to protect themselves by understanding their supply chains and the course of action they should follow if they uncover non-compliance. Specifically, they should consistently carry out (and document) reasonable and proportionate due diligence on the umbrella companies with which they engage, maintain straightforward supply chains and ensure that their team is trained to spot non-compliance and has clear procedures for reporting it.
Specific checks that HMRC expect to see include:
- review of workers’ payslips to confirm that they are receiving at least the National Minimum Wage, that there are no unaccounted-for salary deductions and that the umbrella company is implementing PAYE without any signs of tax evasion activities;
- verification that workers who opt to work through a specific umbrella company have not been offered increased net pay or tax-free payments, which could suggest tax avoidance; and
- assessment of whether the umbrella company delegates its employer responsibilities and, if it does, due diligence should be performed on the relevant outsourced service provider.
Employment businesses should evaluate their existing systems and processes against these standards to ensure they align with HMRC’s requirements. Any shortcomings should be rectified to create a robust due diligence process that clearly mirrors the guidance. Likewise, end user clients should ensure that the employment businesses with which they collaborate are making suitable adjustments to their systems and processes in response to the guidance.