Trouble in the umbrella industry can be managed

Guest blog by Julia Kermode, non-executive director, PayePass

When I was CEO of the FCSA, I lost count of the number of umbrella companies pitching to me, promising they were 100% compliant – but then again, nobody’s going to say they’re 50, 70 or even 90% compliant, are they?

Some claimed to have developed ‘the next big thing’ – promising the moon on a stick. They’d say agencies could sleep soundly and the contractors they engage had every penny of tax correctly deducted. I’d half believe them given they sold such a convincing story. And if that was how I felt, imagine how easy it is for unsuspecting agencies and workers to be swept along.

Back then, these so-called umbrella companies knew that it was difficult to detect exactly what was being done with an agency’s cash. They employed various tactics to profit from money that should have been paid to workers and HMRC. 

Money is diverted before payroll

Today, the few bad apples – who damage the reputation of this largely honest and fair industry – operate in a similar way. Money is easily diverted elsewhere by the umbrella before it even reaches payroll. It may be sent offshore, paid into a trust, paid as a loan or simply skimmed off as additional profit.

Disguised remuneration

These disguised remuneration schemes usually work by diverting a proportion of income via something apparently non-taxable, such as offshore, loan arrangements or trusts. Only a small proportion of a worker’s income is taxed. However, workers themselves are at risk of receiving a huge future tax bill, for which they are personally liable. These schemes can be hard to spot and, in the worst cases, the worker is totally unaware that their tax and NICs have not been paid. 

Skimming is a real problem

An issue brought to light in recent months is ‘skimming’. Even the savviest of people can fail to recognise ‘skimming’, because the worker’s net income paid is broadly correct. Allegations suggest that small amounts have been skimmed by several umbrellas every time a worker is paid, amounting to millions overall.

Holiday pay injustice remains

Holiday pay is another area of concern. All too often, temporary workers don’t realise they are entitled to it. Unethical businesses know this and exploit it. Some have contractual terms which deliberately limit the worker’s ability to claim what is a statutory right. You could argue that because it’s written in the terms that it’s perfectly acceptable – and it is certainly legal. But I think we all know these terms are simply a mechanism to discourage payment of holiday and encourage the resulting profit.   

What’s the solution?

Action must be taken. A few years ago, in an attempt to put a stop to bad practice, payslip audits were undertaken by agencies wanting to verify the compliance of their supply chain. This was a step in the right direction, but even so, agencies had no proof of what exactly was taking place.

The problem was that agencies were sometimes given false documents. I even heard stories of workers being in on this, handing payslips to agencies so everything appears in order. It’s no surprise that agencies fell for this.

Today, it’s perfectly possible to show with certainty that everything is being done properly – that no holiday pay is being withheld, no skimming is taking place, no offshore loans are involved and that workers and HMRC receive the right amount.

We live in an age where technology can track the full journey of monies paid to umbrellas, through all their processes – not just payroll in isolation – to payment of the worker and HMRC. For the first time there is nowhere to hide. It’s as simple as that. 

Regulation needs to happen, but until then…

It’s clear that more must be done to combat dishonest and unlawful practices in the umbrella industry. To its credit, HMRC has started naming and shaming promoters of tax avoidance. This list (found here) is growing and – as a recruiter – it’s important to keep an eye on and steer clear of these operators.

The government is also well aware of the need to regulate the umbrella industry – and has said it will. Although, it’s more than five years since this promise was made. So realistically, we are years away from it and we mustn’t assume that it’s going to be the magic solution if and when it does happen.

With this in mind, agencies are advised to be mindful of the umbrella companies they partner with, and use the technology available to rigorously verify their processes – in turn, ensuring there’s nowhere to hide.   

Through its bespoke software developed to analyse vast amounts of historical payroll data, PayePass is able to guarantee that an umbrella company’s entire payment stream is accurate and fully compliant.

This is a guest blog contribution for the REC website. The views expressed by guest writers reflect the individual's personal opinions.