In response to pressure mounting from union and employment experts to “step up regulation of the temporary labour market” amid concerns of umbrella companies costing workers and the exchequer as much as £4.5bn a year (The Guardian); the government have recently updated their guidance surrounding supply chain due diligence in the aim to provide further support to UK agencies and businesses, placing and using temporary labour and a call for evidence into the umbrella company market.
Following an inquiry into How Contracting Should Work, which exposes “significant” non-compliance in the supply chain, Ruth Cadbury, Labour MP and Co-Chair of the Loan Charge APPG stated it was clear that there is “significant non-compliance in the worryingly opaque supply chain, … and the lack of regulation enables exploitative practices, as well as enabling promoters of tax avoidance schemes to operate” (Contractor Weekly). With the umbrella supply chain now questionably coined as the ‘Wild West’ by the media, there has been mounting pressure for the government to become faster in reacting to these complex arrangements and in this case, consider the knock-on effects to those individuals finding themselves being forced into employment by unregulated umbrella companies.
With this in mind, HMRC have recently launched a new interactive tool designed to help individuals avoid getting caught up in tax avoidance schemes. Whilst the tool has clearly been introduced with the aim to battle tax avoidance for umbrella users, critics have highlighted that there has been a limited focus on educating agencies around the possible risks they may be exposed to when using an umbrella company. In addition, it has also been suggested that the tool offers limited support to employment agencies looking to test an umbrella’s credentials; something hugely in demand since the IR35 incline of contractors moving across to umbrella arrangements. Although HMRC appear to have taken matters into their own hands in terms of further regulating the industry, it arguably raises concerns as to whether the release of this impractical tool simply demonstrates a half-hearted attempt by the HMRC at combatting tax avoidance within the sector.
The recent alterations to government guidance, alongside the points addressed in the Finance Act 2021-22 surrounding tax avoidance, demonstrates the government’s attempt to clamp down on these issues. It has highlighted to agencies the vital significance of actively checking for tax avoidance within labour supply chains, whilst also providing a much-needed starting point for further regulating the umbrella industry. These long-anticipated changes come as welcome news for those umbrella companies who are consistently working to shadow strict regulation and remain compliant within the supply chain.
The principles of May 2021’s, check, act, review remain in place and provide the foundations for businesses on how to minimise risk within the supply chain. With certain accreditation boards in the industry recently being brought to disrepute, and many individuals currently relying on this sense of security alone, it is important that businesses and contractors refrain from focussing solely on these accreditations as proof of legitimacy.
Being involved with an umbrella company operating a tax avoidance scheme at any point within the supply chain can be of huge detriment to a business both financially and reputationally.
Whether it’s through the designing, marketing, selling or managing of assets in relation to the business operating the scheme; HMRC may have the right to publicly identify a business as an enabler of tax avoidance;
compromising both current and future relationships and the ability to maintain contracts.
As an agency responsible for operating PAYE payments made to an offshore umbrella company worker, the liability of paying any unpaid Income Tax and National Insurance contributions caused by the use of a tax avoidance scheme will ultimately lie with the agency. It is therefore essential to perform due diligence on the entire supply chain, whilst continuing to research and implement risk minimisation.
Our free payroll health check provides guidance on ensuring compliance and mitigating potential risks.
The latest guidance suggest adding a number of clauses into contracts with umbrella companies to gain a full insight into their workforce and processes and ultimately safeguard businesses, such as;
- Requesting evidence of PAYE returns filed, and payments made to HMRC;
- Requesting for directors to indemnify your business against tax liabilities;
- Requesting authorisation before further sub-contracting to a third party;
- Requesting payslips for workers. (UK)
When considering using an umbrella company, HMRC advises to always be cautious if you see something which seems out of place or too good to be true, for example, offering of financial incentives. To help gain a deeper understanding of a company, tools such as the Companies House website will allow you to explore the history of a business and use this information to see if it matches up with all that you’ve been told. In these circumstances, researching further into umbrella providers will feed you with useful information that you can share with your workers, both before and during the time that they are employed by the umbrella company.
A key part that we all play in legitimising the umbrella contracting world, is to continue to share knowledge with those we are working alongside – and most importantly, contractors. Educating workers on subjects surrounding tax avoidance, take home pay and GDPR will not only help to ensure that they are fully prepared for their journey with an umbrella company, but it will also help them to identify loopholes that may leave them exposed to disguised remuneration schemes.
By informing workers on how they will be engaged, who is responsible for paying them and how they are due to be paid through means of the Key Information Document, agencies can ensure their practices are fully transparent, before agreeing any contractual terms.
As always, we welcome any updates from the government that work towards regulating the umbrella industry. These guidelines form a vital part of how we construct our own processes here at Bar2 and are essential in navigating the complex world of contracting, legitimately. Although these changes may provide challenges for some agencies and will no doubt open up a steep learning curve for many businesses operating within the sector, we are hopeful that this is the beginning of a journey towards a more compliant, open and fair industry.
Are mini umbrella's placing you at risk of criminal tax evasion?
Involving a Mini Umbrella company in your supply chain could be considered as criminal tax evasion under the General Anti-Abuse Rule.
For a limited time, our expert team are conducting a free, thorough review of your payroll processes and provide guidance on ensuring compliance and mitigating potential risks.