Many businesses use recruitment agencies to source temporary workers. These agencies may choose to outsource the administrative burdens of operating HR and payroll for the workers to an umbrella company. Therefore, many temporary workers of a business may be employed by umbrella companies.
HMRC is encouraging all businesses using temporary workers to familiarise themselves with new guidance published recently.
It focuses on umbrella companies operating tax avoidance arrangements known as disguised remunerations schemes. It offers advice to businesses on how to spot these non-compliant umbrella companies, the risks of engaging with them, and how they can protect themselves and their workers for unintentionally entering into agreements with these companies.
Whilst the guidance focuses on umbrella company non-compliance involving disguise remuneration schemes, there are various other ways in which an umbrella company may be non-compliant.
These range from being involved in mini-umbrella company fraud to payroll fraud. Mini-umbrella fraud abuses two Government incentives aimed at small businesses (the VAT Flat Rate Scheme and the Employment Allowance) and presents an organised crime threat to the UK Exchequer. Payroll fraud involves an umbrella company failing to pay over the Income Tax and National Insurance contributions deducted from worker’s wages to HMRC.
The principles and advice included in the new guidance can help protect you against involvement with a range of non-compliant umbrella companies.
Umbrella companies operating avoidance schemes
Many umbrella companies operate correctly and are compliant with the tax rules. the issue lies with those which are non-compliant, including those that operate tax avoidance schemes known as disguised relation schemes.
Disguised remuneration schemes try to avoid the need to deduct Income Tax and National Insurance contributions which would usually be due under PAYE on payments made to workers.
To achieve this, non-compliant umbrella companies will deliberately describe taxable earnings received by a worker for doing their job as something else which they can claim is non -taxable. this can include grants, salary advances or loans, to name just a few examples. This is in an attempt to enable the workers to receive untaxed payments an increase their take-home pay.
However, the vast majority of these schemes do not work and many have been successfully challenged in courts and tribunals by HMRC, demonstrating clearly that they do not comply with the law.
Responsibility, liability and consequences
It is a business’s responsibility to understand how their workers are engaged, who is responsible for paying them, and how they are paid. Taking this responsibility seriously is a key means of protecting the business from becoming involved in tax avoidance as well as other non-compliant and sometimes fraudulent activities.
If a business uses a temporary worker employed through an umbrella company which is operating an avoidance scheme (paying its workers without correctly operating PAYE), it leaves itself and its workers vulnerable to lengthy tax compliance cheques, tax liabilities and penalties as well as considerable reputational damage.
Protecting your business
There are various steps businesses can take to protect themselves and ensure that any umbrella company they engage with is operating correctly and is fully compliant.
If you’re a business using temporary labour, here's some advice to help you.
First, you should consider adding a clause to your contracts with the agencies who provide you with workers requiring your authorisation before the agency sub-contracts with a third party. This will allow you to know who is involved in the supply chain for the worker, unimportantly that details of any umbrella company involved.
There are some simple warning signs to be aware of which should at the very least urge a further and thorough investigation of the umbrella company in question, such as:
Is the umbrella company based offshore;
Are you or the agency being offered financial incentives to engage with an umbrella company;
Is the umbrella company offering workers increased take-home pay.
It is also recommended that you regularly request pay slips from the umbrella companies involved in your supply chains to conduct sample checks. This will enable you to confirm that PAYE is being operated correctly on the amounts being paid to workers. It is recommended that you request pay slips from the umbrella company for specific workers chosen by you and if possible, cross-reference these with pay slips requested from the workers themselves to ensure they match.
This is just a brief overview of the due diligence cheques businesses can take to avoid using umbrella companies operating avoidance schemes. You can find out more detailed advice on what to watch out for in relation to all types of supply chain noncompliance it's an actions you can take in HMRC's supply chain due diligence guidance.