Umbrella companies
Over the past few months, the REC Legal Helpline has been taking lots of queries about umbrella companies and how they can be used in a compliant way. This section of our legal guide brings together resources that will assist employment businesses when engaging with umbrella companies.
The REC Umbrella Company Factsheet brings together the most frequently asked questions into one factsheet, with our answers and some guidance on how the REC Code of Professional Practice applies to umbrella company arrangements.
What guidance has HMRC produced on umbrella companies?
Guidance for businesses:
HMRC has prepared guidance for businesses using temporary labour involving umbrella companies, the risks of becoming involved in a tax avoidance scheme and steps you can put in place to help reduce it. Read the HMRC guidance: Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme.
Guidance for individuals:
HMRC has prepared guidance for individuals that work through umbrella companies that presents the signs that one bay at risk of being involed in a tax avoidance scheme. Read the HMRC guidance: Warning for agency workers and contractors employed by umbrella companies.
Guidance on mini umbrella fraud:
HMRC has produced guidance on mini umbrella company fraud which includes details of the due diligence checks that should be completed before engagement and how to report potential fraud.
What template documents has the REC produced for members to use when engaging with umbrella companies?
Due diligence checklist:
Checklist 7A - Intermediaries checklist for umbrellas
This checklist is for employment businesses that use umbrella companies to pay temporary workers. It is essential to do appropriate due diligence on umbrella companies to ensure that the umbrella company is acting compliantly and that your business is not exposed to unnecessary risk.
We've drafted this checklist to help you do that due diligence. It is a template document which can be tailored to meet the requirements of your business and any requirements specific to the sectors you operate in.
Contracts:
Use our combined Contract 3A with your clients when you are supplying workers via an umbrella company and use Contract 4A with the umbrella company.
Other documents for use with umbrella companies
How do I identify a mini umbrella company?
At the moment, umbrella companies operate free from regulations. For years, this has facilitated the exploitation of a tax loophole by some, through outsourcing payroll duties to 'Mini-Umbrella Companies' (MUCs). MUCs are set up as limited companies incorporated in the UK with British directors and a small number of temporary workers. These directors are typically replaced after a short period by an overseas director with minimal responsibilities.
The attraction for umbrella companies and MUCs to engage in such fraudulent activity is that by abusing two UK government incentives (the VAT Flat rate scheme and the Employment Allowance), MUCs manage to escape their responsibilities of paying PAYE, National Insurance Contributions and other taxes. This means temporary workers do not receive all they are entitled to, and it costs the UK taxpayer millions of pounds in lost tax revenue every year. Once the MUC has grown and no longer qualifies for tax relief, the payroll duties are shifted to the next MUC that still qualifies, and the pattern continues. This has resulted in workers being shifted from one MUC to the next and being paid by companies they have never heard of. This kind of fraudulent activity has been exposed by the media in the past, damaging the reputation of all parties involved.
In April 2020, the government introduced legislation requiring employment businesses to provide a Key Information Document to work-seekers prior to agreeing terms with them. This was introduced as an amendment to the Conduct Regulations under regulation 13A. In practice, the Key Information Document should be the first thing given to work-seekers, as a way of increasing transparency and providing essential information on the assignment, including the name of the employer and how they will pay the worker. One of the effects on employment businesses of the of MUC involvement, is that shifting payroll duties from one MUC to the next, impacts the accuracy of the information provided to work-seekers in the Key Information Document.
Under regulation 13A of the Conduct Regulations, employment businesses are legally obliged to include the name of the employer who is responsible for paying the worker. As stated by HMRC in May 2021, "it is your (employment businesses') responsibility to be clear about who pays the workers and how they are paid" and failure to do so constitutes a breach of the Conduct Regulations.
Something proven to catch many employment businesses out is the 'your employer' and the name of the payer component of the Key Information Document for umbrella companies. Where the payment of workers is to be outsourced to MUCs, employment businesses have at times followed directions from umbrella companies to include the statement "to be confirmed at time of assignment commencement" or "to be introduced by (name of umbrella company)" or similar, in an attempt to fulfil the requirement of regulation 13A of the Conduct Regulations. However, the lack of clarity and accuracy is unsatisfactory and breaches the regulations. HMRC have published detailed guidance on this.
In order to mitigate the risks of MUC involvement in the supply chain, it has become critical for employment businesses to take responsibility by conducting regular due diligence checks on umbrella companies and being clear about who pays workers and how. As part of due diligence checks, employment businesses should be vigilant to identify the involvement of unusual company names, unrelated business activity listed on Companies House, names of foreign national directors, transient businesses, and the frequent movement of workers from one MUC to the next.
Whilst umbrella companies remain unregulated, there are signs from HMRC that it is working to close this tax loophole and make the operation of MUCs illegal. In order to save themselves from reputational and financial damage, employment businesses should adhere to the requirements under the Conduct Regulations, specifically regulation 13A, and consider contacting HMRC if they have concerns about MUC involvement in their supply chains. Employment businesses can also implement a process to ensure that any changes made to the information initially provided by the umbrella company, is updated by that umbrella company allowing the employment business to update each temporary worker's Key Information Document.
How are umbrella companies regulated?
Currently umbrella companies are not regulated at all, however government has set out plans for regulation.
Following the publication of Matthew Taylor’s ‘Good Work Plan’ the government committed to act on the recommendation within the report and introduce legislation to expand the remit of the Employment Agency Standards Inspectorate to cover umbrella companies. The legislation that will bring umbrella companies within the scope of the Employment Agencies Act 1973 and the Conduct of Employment Agencies and Employment Businesses Regulations 2003 has not been enacted yet as we still await the Employment Bill, which is now due in 2022.
The REC will keep members up to date on deveopments when they occur.
What are the new proposals to clamp down on promoters of tax avoidance, including umbrella companies?
Government has consulted on draft legislation to implement measures that give HMRC the power to close down companies involved in promoting tax avoidance. This will help taxpayers to identify and steer clear of avoidance schemes by naming companies, including umbrella companies, which are under investigation by HMRC and controlled by promoters.
The proposed changes are designed to clamp down on the supply of tax avoidance arrangements and include:
- a new power for HMRC to seek freezing orders that would prevent promoters from dissipating or hiding their assets before paying the penalties that are charged as a result of them breaching their obligations under the anti-avoidance regimes
- new rules that would enable HMRC to make a UK entity, who facilitates the promotion of tax avoidance by offshore promoters, subject to a significant additional penalty
- a new power to enable HMRC to present winding-up petitions to the Court for companies operating against the public interest
- new legislation that would enable HMRC to name promoters, details of the way they promote tax avoidance, and the schemes they promote, at the earliest possible stage, to warn taxpayers of the risks and help those already involved to get out of avoidance
Please see here for the published draft legislation and accompanying explanatory notes.
How can umbrella companies fit into alternative supply models?
Not all supply chains with umbrella companies take the traditional route. There are some supply models being promoted within the industry where the umbrella company acts in a different capacity.
Professional Employer Organisations
Professional Employer Organisations or ‘PEOs’ are companies which provide outsourced services such as payroll functions and HR functions to their clients (i.e. employment businesses) but also enter into arrangements to jointly employ their clients’ staff, meaning that that they act as the employer of record for tax purposes. This type of employment arrangement is relatively new to the UK and can involve high levels of risk for businesses if the model is not fully compliant with tax and employment laws.
This model offers particular benefits for companies principally based overseas but with workers working in the UK. It may also reduce VAT bills (where clients cannot offset their VAT costs).
Before you engage with any intermediary for this type of supply you must understand exactly what the contractual relationship will be and the impact in terms of your exposure and the position of your workers.
For more detail on how PEOs operate and advice on what to watch out for if you are considering this type of supply, see Other supply models - PEOs and Statements of Work within our IR35 legal guide section.
What is the HMRC ‘Tax avoidance- don’t get caught out’ Campaign?
The following information comes from HMRC's ‘Tax avoidance- don’t get caught out’ Campaign:
Tax avoidance is when people bend the rules of the tax system to try to pay less than they owe by using a tax avoidance scheme.
Who is the campaign aimed at?
HMRC’s new look ‘Tax avoidance: don’t get caught out’ campaign helps contractors, agency workers and those working through umbrella companies understand how they’re being paid, to make sure they’re not involved in tax avoidance.
What can contractors or agency workers do to protect themselves?
They can learn how to recognise the signs of tax avoidance and understand the financial risks by using HMRC’s how to spot tax avoidance guide and explore personal stories of people who have been caught up in tax avoidance. Further guidance has now been produced by HMRC on understanding the signs of tax avoidance schemes (25 Aug 2022), which can be found here.
Some contractors may be employed through an umbrella company. It’s worth understanding how umbrella companies work as some try to break the tax rules.
HMRC’s guide to what it’s like to work through an umbrella company explains.
They can also use the payslip guidance to understand more about what their payslip should look like and use the interactive risk checker to check if their employment arrangements may involve tax avoidance.
Contractors can report a tax avoidance scheme to HMRC if they are worried about becoming involved in tax avoidance or want help to get out of a scheme.
What can you do to help?
As an organisation who deals with contractors or whose members deal with contractors, you can help by sharing the ‘Tax avoidance - don’t get caught out’ campaign page through the communications channels available to you. This will help extend the reach of the campaign and get the information into the hands of those contractors and agency workers who it will most benefit.
How can we help you do this?
To help support you we have published a stakeholder pack containing ‘ready-made’ communication resources for you to use and easily share across your own channels, to help provide important information about the ‘Tax avoidance – don't get caught out’ campaign to those who need it.
Please contact Vina Patel in the HMRC Counter Avoidance Briefing and Engagement team at vina.patel@hmrc.gov.uk for more information about the stakeholder pack and the campaign more generally.
What do we want to achieve?
HMRC wants to help your contractors understand their pay arrangements, so they don’t end up with an unexpected tax bill.
We would appreciate your support in reaching contractors and agency workers with the helpful messages contained in the ‘Tax avoidance - don’t get caught out’ campaign.
Let us know what you think
We are keen to hear your views on the campaign which you can give using this short survey. Completion of the survey is voluntary, but comments you share with us will help improve future campaign messages and our engagement with you.
Cloning of umbrella companies
Fraud targeted at the recruitment sector.
Fraud is an issue which affects individuals and business and organisations in many different sectors. Recruiters and their contractors are not immune to fraudulent activities.
We have been made aware of specific targeted activity which is targeted at umbrella companies in an effort to obtain monies from recruiters and contractors.
This involves the ‘cloning’ of umbrella companies, with fraudulent companies taking on similar names to those of genuine umbrella companies and seeking to attract business from recruiters and contractors.
We would urge recruiters to be exercise caution when working with umbrella companies and to take steps to verify that the company is genuine. In particular if you are contacted by an umbrella company that you work with regularly or have worked with before, asking you to update the payment details that you have for them, do ensure that this is a genuine request. You can do this by contacting the umbrella company through your usual contact channels and if in doubt using virtual face communications can also help you to confirm that you are dealing with the correct company.
When contacted by new umbrella companies, if they are a member of FCSA and/or Professional Passport, you will be able to check at least whether the registered company number that they aligns with their company name is the same as that on the FCSA Directory of Members • FCSA Accreditation or Professional Passport member lists, in addition to your other due diligence checks.