The government has released new guidance for UK-based recruitment agencies and businesses that place temporary workers with umbrella companies. The guidance aims to help companies to reduce the risk of referring candidates to non-compliant umbrella companies. We’ve summarised the guidance below, and it’s well worth a read.
Understanding the threat
If you represent a recruitment agency that places temporary candidates, you are likely to know about umbrella companies and the benefits they can provide both your agency and your candidates. However, while a majority of umbrella companies provide compliant PAYE payroll services, some are non-compliant. The government’s guidance states that “you need to be aware of the potential dangers of umbrella companies that operate tax avoidance schemes. Using one can lead to reputational and financial damage.”
Some umbrella companies operate unethically and are disguised remuneration schemes. These arrangements often market themselves as compliant because they take advantage of tax breaks. However, disguised remuneration schemes result in temporary workers underpaying tax and recruitment agencies that refer candidates to such arrangements (even if it’s a mistake) could face penalties in the future. For more information, read up on the 2017 Criminal Finances Act.
How do disguised remuneration schemes operate?
Usually, a disguised remuneration scheme involves a temporary worker being paid by a non-compliant umbrella (a tax avoidance scheme). In these situations, the umbrella company will process some of the worker’s pay with Pay As You Earn (PAYE). However, the rest of the worker’s pay will be treated as non-taxable, therefore, not subject to PAYE.
The government provides a list of untaxable payment methods that could be used as part of a disguised remuneration arrangement:
- salary advances
- capital payments
- credit facilities
- profit shares
- shares and bonuses
- amounts held in a fiduciary capacity
All of the above arrangements would involve a temporary worker being paid through a non-compliant umbrella, and take-home pay will be inflated due to the untaxed payments. And, if your recruitment agency refers a temporary candidate to such an arrangement, your business becomes part of the supply chain.
The consequences of referring candidates to non-compliant umbrella companies
Unsurprisingly, a majority of disguised remuneration schemes don’t work and are quickly shut down by HMRC. The government has a strong record when challenging disguised remuneration schemes
If your agency engages with temporary workers and they use avoidance schemes for their payroll, your workers and agency are at risk of tax compliance checks, penalties and outstanding liabilities. Your agency is also at risk of unrepairable reputation damage that may result in a significant loss of business. It could cause your business to fail.
What are the penalties for enablers of tax avoidance?
Recruitment agencies can be held accountable for enabling tax avoidance by making non-compliant referrals. The latest government guidance states:
“If the umbrella company operates a tax avoidance scheme, you may incur a penalty for enablers of tax avoidance. This penalty applies to those who design, market, sell, manage or otherwise enable the use of abusive tax avoidance arrangements which are later defeated by HMRC.
If you enter into a contract with and make payments to an umbrella company operating an abusive tax avoidance scheme, you may have enabled the use of that arrangement.
The penalty is 100% of the fees receivable in consideration for any actions taken by you which enabled the arrangements. If you receive an enabler penalty, HMRC may also be able to publish your details, which will publicly identify you as an enabler of defeated tax avoidance.”
Recruitment agencies are liable for PAYE when payments are made to a worker who is offshore. This is stated in the offshore employment intermediaries rules. Consequently, you could also be responsible for settling underpaid income tax and national insurance contributions if a non-compliant umbrella company is in the supply chain. Most offshore umbrella companies will deliberately hide the fact they’re not located in the UK and will try and mislead referring parties. Make sure you only make referrals to umbrella companies you can trust.
Protecting your business from non-compliant umbrella companies
The guidance includes several tips to help recruitment agencies protect themselves from the risks associated with referring candidates to non-compliant umbrella companies.
- Make sure you conduct thorough due diligence on each umbrella company that is on your recruitment agency’s Preferred Supplier List (PSL). You must understand how your workers are engaged, who is paying them, and how their payroll is being processed.
- Understand what you need to do when engaging with a temporary worker.
- Review the contracts you have with umbrella companies, and consider adding clauses. Contract clauses could include requesting umbrella companies to provide payslips upon request, evidence that PAYE is being processed, and the option to request indemnity insurance from directors should the umbrella operate non-compliantly. It may also be worth asking the umbrella company to provide guarantees that you’ll be notified if a third party is ever engaged regarding your workers.
- Check the payslips that are being provided to your workers from umbrella companies. Ensure PAYE is appropriately processed and your candidates pay the correct amount of income tax and national insurance.
- Always be “extremely cautious” when you engage offshore umbrella companies or umbrella companies that are offering you financial incentives in exchange for referrals.
- Look up any umbrella company you’re considering having on your PSL – before you add them. Check Companies House and make sure the umbrella company you’re considering has a good track record. Don’t forget the recent mini umbrella company fraud that targeted vulnerable temporary workers.
- Be sure to educate your candidates and let them know how compliant umbrella companies operate. They must be well-informed before selecting an umbrella company for their payroll. Later in this article, we share numerous resources that may be helpful.
Recruitment agencies that engage with temporary workers who require the services of an umbrella company will need to provide them with a Key Information Document (KID). A KID provides workers with an accurate overview of their earning potential and will show what deductions will be made to their pay (income tax, national insurance, employment costs, etc.).
Churchill Knight has specialist Key Information Document available to all our partnered recruitment agencies. Our software allows recruitment consultants to request a customised KID in a matter of seconds. And, once the short online form is complete, the KID will automatically be emailed to the consultant, and the contractor (if required). To find out more about our Key Information Documents, please visit our blog: Key Information Documents for Agency Workers.
Educating your candidates
The government has provided numerous links to resources designed to help temporary workers understand how umbrella companies should work, and the risks associated with disguised remuneration schemes.
- Tax avoidance – don’t get caught out
- Working through an umbrella company
- Umbrella companies offering to increase your take home pay (Spotlight 45)
- Comparison and broker websites marketing umbrella companies are not always what they seem (Spotlight 55)
The following resources may also be helpful for your consultants and candidates:
- Recruitment agencies beware: the criminals behind mini umbrella companies may come knocking
- Recruitment agencies must be aware of company cloning security threat
- Churchill Knight Recruiter Guide Series
- Protect your key workers by ensuring they stay clear of tax avoidance schemes
Reporting non-compliant umbrella companies
If you are ever approached by a representative of a non-compliant umbrella company, or you suspect an organisation is up to no good, the government is urging you to report them. More information is available here.
Visit the government’s website for the original guidance
Please click on the following link to read the full government guidance: Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme
Refer your limited and umbrella candidates to Churchill Knight
Founded by experts with over 20 years of industry experience, Churchill Knight & Associates Ltd is one of the longest servicing contractor accountants in the UK. Since 1998, we’ve helped tens of thousands of contractors and freelancers with the running of a personal service company (PSC).
Over the years, the industry has changed – usually as a result of government amendments to IR35 legislation. As a result, we launched Churchill Knight Umbrella – a specialist PAYE umbrella company. Churchill Knight Umbrella has grown quickly and we are proud to process the payroll of thousands of contractors every week. We’re also partnered with hundreds of recruitment agencies – making it our priority to ensure they and their candidates receive a service that is second-to-none.
Churchill Knight & Associates Ltd and Churchill Knight Umbrella are committed to compliance within the contractor payroll sector. Both organisations are proudly accredited by the FCSA. The FCSA (Freelancer and Contractor Services Association) is the most recognised and respected professional body dedicated to ensuring the supply chain of the UK’s temporary workforce is compliant with UK tax law. Both companies have undergone extensive audits and assessments to earn the prestigious accreditation, and earlier in the year, they passed their annual FCSA audits.
Whether you’re interested in finding out more about our contractor accountancy, you have candidates that could benefit from our umbrella company, or you have questions about partnering with us – we’d love to hear from you. Please call our dedicated Agency Department on 0808 2525533, or contact us using the form on this page. Alternatively, if you have a candidate you would like to refer to us now, please complete this form, and one of the team will contact you shortly after to discuss moving forward.