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HMRC guidance for Employment Businesses working with Umbrella Companies

Alison Roberts

Alison Roberts | Legal Director

Wednesday 20th Dec, 2023

While the sector waits for the outcome to be published on the government’s Call for Evidence on Tackling non-compliance in the umbrella marketplace,HMRC have released guidance for employment businesses who work with umbrellas.

The document may be seen by some as showing at least a greater understanding by government of the issues facing the industry. There is also, perhaps, a nod to industry feedback and elements of best practice gleaned by HMRC from trade bodies and its own compliance activities.

The guidance notes explain to employment businesses the importance of protecting themselves and the workers they supply, from non-compliant elements in their supply chain.

Legal responsibilities

It begins by reminding readers of the specific legal regulations to which the sector must adhere, from the Employment Agencies Act 1973 and Conduct Regulations, through to the Agency Workers Regulations 2010.

It moves on to point out the continuing need for employment businesses to ensure that they:

  • File quarterly intermediaries returns.
  • Follow the PAYE regulations where offshore intermediaries are involved.
  • Abide by the VAT self-billing requirements with an umbrella company.
  • Pay tax and NICs on third party incentives or rewards from third parties to its employees.
  • Account for taxable income from third parties, like umbrella companies.
  • Ensure that effective right to work checks are carried out in their supply chain.
  • Act to avoid breaches of the Bribery Act.

Protecting workers

Supporting and protecting workers is a central theme in the guidance. It encourages the use of compliant umbrella companies and the need for proper explanations to be given on what umbrella employees should expect.

Clarity around pay rates and differentiating between assignment or contract rates is stressed, alongside the importance of providing a Key Information Document (KID) to workers.

Protecting your employment business

Here the advice from HMRC is to only use umbrella companies on which the employment business has carried out effective due diligence. It continues by encouraging regular and reasonable checks to identify all entities in the business’s supply chain and to understand how workers are being engaged and paid.

Due diligence activities are then suggested:

  • Being wary of umbrella companies with a very high take-home pay promise – often a sign of potential tax avoidance.
  • Checking an umbrella company’s VAT registration and that it is charging VAT.
  • Check the umbrella company’s registration on Companies House against the details provided to the business.
  • Find out if the umbrella company is outsourcing any of its employer responsibilities, ask why and carry out due diligence on the third party.
  • Obtain and check payslips and reconciliation statements to check for unexplained deductions and that PAYE is being operated.
  • Check that the umbrella company has the required employer liability insurance.

The guidance goes on to recommend that employment businesses structure supply chains as simple and as short as possible to identify any potential umbrella fraud or tax avoidance.

Working with non-compliant umbrella companies

The risks and consequences of involvement in non-compliant supply chains are explained in this latest guidance; including prosecution for failing to prevent tax evasion in the supply chain, denying the employment business VAT input tax claims, penalties for enabling the use of, or involvement in tax avoidance schemes and arrangements etc.

HMRC also point out that, of course, some of the most damaging effects of involvement with non-compliant umbrella companies is as much about reputation and the inability to generate any new business.

Final thoughts

The impression given by the guidance and its focus may be an informal indicator of government and HMRC’s thinking on the future of the umbrella marketplace. We will, however, have to wait until the draft outcome of the 2023 consultation is published late 2024 or early 2025.

Helping workers understand their rights and tightening due diligence up and down the supply chain with a heavy lean towards effective compliance - these are challenging objectives which are welcomed by all in the sector, bar those who seek to abuse it.

Find a closer look at the detail of the HMRC guidance here.

Related article - The long-awaited government consultation is published

Following the Good Work Plan of 2018, which introduced a commitment by the government to regulate umbrella companies, a call for evidence in 2022 gathered the opinions of over 400 contractors, representatives and stakeholders within the umbrella company market. As expected, the evidence gathered supported the rationale for state enforcement.

Government consultation
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