How to identify a compliant umbrella company

3rd June, 2021

A combination of recent legislative changes and a damning report exposing widespread non-compliance in the umbrella company industry have underlined how crucial it is for recruitment agencies and their end-clients to secure their supply chains. But how do you identify a compliant umbrella company?

Why agencies need to secure their supply chains

The April 2021 introduction of the Off-Payroll rules to the private sector holds significance not only for contractor supply chains but also for the umbrella company industry, where many businesses have experienced an influx of clientele. Unfortunately, many non-compliant operators have sought to capitalise on the industry’s newfound popularity, resulting in a proliferation of disguised remuneration schemes.

Whereas many agencies and their end-clients have looked to umbrella companies for low-risk engagement models, the insertion of a non-compliant umbrella company into the supply chain is obviously counterintuitive. With the Off-Payroll rules’ debt transfer provisions permitting HMRC to pursue agencies and end-clients for tax shortfalls resulting from non-compliance elsewhere in the supply chain, engaging a non-compliant provider could prove an expensive mistake to make.

Experts have also warned that even an unwitting engagement with disguised remuneration scheme operators could leave businesses facing prosecution and an unlimited fine under the Criminal Finances Act 2017.

The full extent of the problem was recently laid out for all to see in the Loan Charge All-Party Parliamentary Group’s recent report. This exposed the prevalence of disguised remuneration schemes within the industry, as well as other non-compliant practices including unlawful tax deductions and the covert withholding of holiday pay from contractors.

Signs of a compliant umbrella company

The importance of engaging a compliant umbrella company cannot be overstated. Fortunately, there are various indicators of a compliant provider. These include:

Taking care of employment rights: Compliant umbrella companies assume the role of employer. As such, contracts issued by compliant umbrellas should be contracts of employment, entitling the recipient to rights and protections including holiday and sick pay.

Undertaking regular audits: Any compliant umbrella company should undertake a third-party compliance audit from a reputable tax consultancy on at least an annual basis, providing you with crucial confirmation that their payroll is operating as it should.

Accessibility: Genuine umbrella companies pride themselves on their accessibility. If an umbrella company is proving difficult to contact, you might want to question why this might be.

Transparent practices: A compliant umbrella company will have nothing to hide and should be able to provide their clients with a first-hand demonstration of their compliant payroll processes, either on request or through their core service offering.

Encourage contractors to set up a Personal Tax Account: Compliance-first umbrella companies take transparency one step further by recommending their employees register a Personal Tax Account with HMRC. By encouraging contractors to put their records on display, umbrella companies do not just say they have nothing to hide, they show it.

Though industry accreditations are often a promising sign, they are by no means a guarantee of compliant practices, with questionable standards and poor policing of codes of compliance leaving scope for abuse by accredited suppliers. As such, agencies are encouraged to look beyond industry accreditations when evaluating an umbrella company.

Signs of a non-compliant umbrella company

Similarly, there are numerous characteristics that may point towards a non-compliant umbrella. These should act as red flags when speaking to a prospective provider, and include:

Advertising questionable levels of take-home pay: Disguised remuneration schemes are known to offer contractors questionable levels of post-tax take-home pay. If an umbrella is advertising take-home pay exceeding 80% of a contractor’s pre-tax earnings, you are advised to steer well clear.

Company registered overseas: If an umbrella company has an overseas address, it may indicate that they operate different tax arrangements to those enforced in the UK.

Newly incorporated business: New companies are often more willing to indulge in non-compliant practices if it is perceived to aid company growth. Newly founded businesses can also indicate directors with a questionable history of previous phoenix companies, so you may wish to carry out some background research.

Dubious payslips: An umbrella payslip should state the employer’s NI liability and the employee’s holiday pay entitlements, and all employee income must be subject to tax and NI deductions. If an example payslip provided by an umbrella fails to meet this description, avoid the company at all costs.

How to keep a compliant PSL

For agencies, maintaining a Preferred Supplier List (PSL) can contribute towards operational efficiencies and seamless engagements, while helping nurture mutually beneficial business relationships.

However, the key advantage of running a PSL is that it helps maintain a compliant supply chain. But this benefit is only realised by recruiters who carry out the necessary due diligence to ensure that their recommended umbrella companies are compliant.

To ensure compliance among new and existing members of your PSL, you may wish to establish a PSL checklist. This should cover many of the aforementioned issues and more, including requiring that the umbrella company in question:

• Can demonstrate proof of regular third-party auditing of its services
• Can demonstrate correct treatment of employees from a tax and employment rights perspective
• Can prove that it has a 100% compliance record with HMRC
• Has been set up in the UK and conducts all of its activities onshore
• Is knowledgeable of the latest legislative issues facing the industry

Using KIDs to secure your supply chain

Following their introduction in April 2020, recruiters are legally required to provide Key Information Documents (KIDs) to both their contractors and any other intermediary that may happen to be in the supply chain.

Designed to introduce transparency and reduce the scope for non-compliance, KIDs are supposed to detail all payment information, including highlighting the difference between the gross amount paid to the umbrella company and the contractor’s net amount following income tax and employee’s NICs.

Theoretically, the provision of a KID should prove an effective deterrent for any would-be non-compliant umbrella company. However, failing this, encouraging contractors to report any discrepancies between the pay received and that outlined in their KID should help you root out any non-compliant providers.

Taking care of your contractors

As well as non-compliant tax practices, the recent Loan Charge APPG report has placed the treatment of umbrella employees under immense scrutiny. Though the full fallout from the report remains to be seen, with pressure mounting, many expect that the fair treatment of employees will soon become as important as ensuring compliance from a tax perspective.

At Orca Pay Group, our concept of umbrella company compliance has always encompassed the fair treatment of employees via correct taxation and the awarding of full legal entitlements.

This is why we developed The Apex, our payroll and compliance solution, which monitors and ensures full payment of rights such as holiday pay, with any outstanding entitlement automatically paid out at the end of each calendar year. By offering total transparency via ongoing access to a fully auditable payroll history, The Apex also provides our clients with the necessary assurances that every penny is where it should be, and that their supply chain is secure.

Orca Pay Group is dedicated to end-to-end compliance and fair treatment of contractors, meaning we are an umbrella company with a difference. Contact a member of our team on 0800 090 3798 or to learn more about how our differentiated service offering can support your engagements.