This is a guest blog written by Mark Taylor of REC business partner Chartergate Audit Services 

Engaging with Umbrella Companies: Part One – Section 44

Chasing operational efficiency and commercial agility, employment agencies often turn to umbrella companies to engage CIS subcontractors.  Many compliant umbrella companies will satisfy this brief.  However, amidst the allure of streamlined processes lies a landscape fraught with compliance pitfalls. In this inaugural article, Chartergate Audit Services sets out key compliance steps for agencies when utilising umbrella companies for CIS subcontractors.

Each instalment in this series will dissect a distinct compliance risk, offering actionable insights to enable agencies to monitor and safeguard their supplier’s compliance. Today, we look at the crucial issue of employment status for tax purposes, governed by Section 44 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

Section 44: The Test and the Agency’s Liability

Under Section 44, (commonly known as the 'intermediaries legislation’), employment agencies will, in the majority of cases, bear the burden of any tax, National Insurance (NI) and penalties where subcontractors are wrongly classified as self-employed. As ‘intermediary 1’ statute places agencies, squarely in the crosshairs of compliance scrutiny when engaging self-employed subcontractors even where an umbrella company is also in the supply chain.

To mitigate these risks, agencies must undertake a meticulous audit of the supervision, direction, or control (SDC) test applicable to Section 44. This entails a holistic examination of contractual arrangements and operational dynamics, with a keen eye toward delineating the boundaries of autonomy afforded to subcontractors.

Roadmap to Compliance

Our roadmap to compliance encompasses three fundamental pillars:

1. Contractual Scrutiny: Analysis of the contractual agreements to dissect the nuances of supervision, direction, or control exerted over subcontractors. While it can be difficult for agencies to obtain all relevant contracts, but as a bare minimum, agencies must assess the terms, they are party to and determine the SDC position in those.
2. Operational Assessments: Complement contractual reviews with thorough assessments of practical working arrangements. Where employment agencies use umbrella companies to assess the SDC position, that agency must audit the SDC due diligence measures undertaken by the umbrella company to ensure their suitability, veracity and effectiveness.
3. Ongoing Vigilance: The recent mini-umbrella judgement in Elphysic Ltd and HMRC Spotlight 64 underscores the necessity for agencies to understand and audit the structure of any arrangements adopted by an umbrella company. Agencies must monitor umbrella companies to ensure adherence to compliance standards, scrutinising contractual, engagement, and payment documentation to ensure they are commensurate to the services that that they have been sold.

Monitor and Safeguard your Compliance by RISC™ Accrediting the Supply Chain

At Chartergate Audit Services, our commitment to compliance is unwavering. Through the CIS RISC™ Accreditation programme, we conduct random and unannounced audits throughout the year, ensuring that umbrella companies uphold rigorous compliance standards. From reviewing contractual terms to integrity checks of operational structures, we leave no compliance stone unturned.  Requiring your umbrella company suppliers to be RISC™ Accredited will ensure they are and remain compliant.