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Employment agencies warned over rogue umbrella companies

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HMRC has warned that umbrella companies are using employment and recruitment agencies to promote tax avoidance schemes. Rebecca Seeley Harris reports on the steps agencies need to take to reduce their risk of promoting non-compliant umbrella companies. ​​​​​​

7th May 2024
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The government had been expected to respond to the consultation on Tax Administration and Maintenace Day, but their response was to issue a statement saying that they would respond in due course. They did, however, state that they would be minded to introduce a due diligence requirement to drive out bad actors from the labour supply chain. So, HMRC's new guidance Spotlight 64 'Warning for employment agencies using umbrella companies' is some timely advice to employment agencies and others using umbrella companies.

HMRC is aware of some umbrella companies that use employment and recruitment agencies to promote their tax avoidance schemes. Whilst employment agencies might believe they are agreeing to one set of arrangements, it could be a tax avoidance scheme that the umbrella is promoting.

Employment agencies and employment businesses should consider the following:

  • check very carefully the details they are given by umbrella companies about their products
  • consider taking independent professional advice if they are unsure if an umbrella company they plan to use is compliant

HMRC recommends that agencies must also carry out due diligence to make sure they are not using non-compliant umbrella companies. So, what does due diligence look like?

What are the signs?

This is not an exhaustive list but, if an umbrella company does the following you should be wary:

  • offer financial incentives significantly higher than industry standards
  • provide the workers and agency with different versions of the payslip
  • make payments to workers that are higher than the amount on their payslips
  • make payments to third parties, who then make payments to the workers
  • are based outside the UK

Due diligence

There are various steps you can take to help reduce your risk of promoting non-compliant umbrella companies. These include:

Potential risks

What are the potential risks to the agency? Apart from reputational risk, the agency or other businesses could face financial damage due to penalties and tax liabilities. HMRC will pursue anyone who promotes or enables tax avoidance. If HMRC defeats an abusive tax avoidance arrangement, they will use the ‘enabler penalty’ regime – the penalties for enablers of defeated tax avoidance schemes – CC/FS43.

This will be used against anyone who:

  • Designed the arrangement
  • Sold the arrangement or
  • Enabled the use of the arrangement.

Under new powers that were introduced in 2022, HMRC can also publish information about enablers when they are suspected as being involved in:

  • Promoting a tax avoidance scheme
  • Having a role in making a scheme available to use

Under POTAS

There is also a new criminal offence connected to the Promoters of Tax Avoidance Schemes (POTAS). These rules aim to deter the development and marketing of avoidance schemes. The regime builds on the Disclosure of Tax Avoidance Schemes (DOTAS). It draws on and reinforces existing disclosure obligations and shares many similar definitions. This means that this guidance frequently refers to the existing DOTAS guidance.

The proposed changes would be to create a new strict liability offence where a failure to comply with a Stop Notice would be a criminal offence regardless of the person’s intent. A conviction would result in either an unlimited fine, a potential prison term of up to two years or both.

Stop notices

The majority of these schemes involve being paid partly the national minimum wage and a proportion in an ‘arrangement’. Some of the arrangments under current Stop Notices are:

  • An advance on a discretionary bonus which is not yet determined and is, therefore, not taxable.
  • An Option Grant Agreement paid to grantee’s who are Scheme Users
  • Bonus, Incentive or Pay Scheme Offer
  • Master Advance Agreement
  • Employee Cashflow Facility
  • Remuneration Trust

Some of these arrangements will also either be offshore or in the Isle of Man.

Advice to workers

Employment agencies and other businesses should share information with the worker before and during a time that an umbrella company employs them.  This will help workers to:

  • Spot the warning signs of tax avoidance
  • Report tax avoidance
  • Leave or report a tax avoidance scheme

A good list of due diligence requirements are the following:

  • Ensuring that workers are paid in PAYE and not partly in loans or other arrangements
  • The umbrella pays pensions
  • Provides a copy of a payslip or uses a payslip checker
  • The umbrella operates a UK bank account

The umbrella company should be open to spot checks and shouldn’t offer incentives. 

Policing due diligence

The Recruitment Industry Status Report states that there are now over 30,000 recruitment companies in the UK but, it’s not clear how HMRC will police these or whether that will be a part of the new Single Enforcement Body (SEB) that the Labour Party will create if it wins the General Election.

Replies (13)

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By FactChecker
07th May 2024 14:22

Still no answer to my (no doubt naïve) question from previous articles on this topic:
What are the 'good' reasons, if any, for using an Umbrella company?

All the 'bad' reasons hinted at above are not achieved *because* an umbrella company was used ... but by seeking to 'hide' reprehensible activities at one remove.
And those 'warning signs' - is that really all they are? They seem to me more like a flotilla of red flags with klaxons sounding!

So why does anyone use them?

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By rememberscarborough
07th May 2024 15:26

Why do they use them? To make money of course!!

In the remote chance that HMRC do investigate and choose to take action they can liquidate the companies involved and those that promote these schemes have enough legal clout to ensure HMRC don't go anywhere near them because the legal costs involved don't make it cost efficient.

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By Sandnickel
07th May 2024 18:27

My experience within agencies is that they are more heavily involved than this article seems to believe.

Agencies generally know what they are getting into and are quite happy to take the backhander whilst leaving the umbrella to carry the can if ever it goes wrong.

To answer the question of why an umbrella company would be used is quite simple. At its heart an umbrella company is a payroll company. Many, many companies outsource their payroll function - why would an agency be any different? The corruption of the industry is far more widespread than the umbrella company format and it is naive in my opinion to think it will be easy to change.

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By Paul Crowley
07th May 2024 20:29

About eight years ago I audited an employment agency that did just that, sold or introduced by one of the big four, who told them that the wages for the staff supplied could be self-employment, instantly saving all ERNIC. They chose to go with the big four scheme and could now afford the big four accountant.
There was also an issue with the 'accidental' error in submitting a wrong VAT return. The accounts bit still worked, as in showing the correct as VAT, but HMRC did not know that they owed the money.

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By FactChecker
08th May 2024 00:42

Widespread I'm sure (and probably more prevalent amongst the old 'big boys' who think that entitlement is a badge to be worn with pride).

So why aren't the rules changed such that the ultimate liability rests with the end employer (not the employee who often is unaware of what's happening or with the intermediary who vanishes phoenix-like at the first whiff of discovery)?
That would focus their minds when sourcing staff wouldn't it?

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By Sandnickel
08th May 2024 06:53

Responsibility can flow through to the end user. HMRC just goes for the low hanging fruit.

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By FactChecker
08th May 2024 00:33

Thanks ... so you're confirming my cynical conclusion - that they're (often/mostly) used quite deliberately "to 'hide' reprehensible activities at one remove".

But my original overly naïve (if possibly too subtle) question was seeking to uncover if there are claimed to be any benefits (on the 'good' reason scale) for using them - even if only to act as a fig-leaf obscuring their real reasons?

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Replying to FactChecker:
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By Sandnickel
08th May 2024 06:51

That isn't what I said. My post was to point out that agencies aren't quite as innocent as this article appears to suggest, not to say everybody is doing the same thing. There are, believe it or not, decent umbrella companies out there.

The benefit to the agency is to relieve an admin burden. The main benefit to the worker is the continuity of employer, you can move around different agencies and jobs without switching employer each and every time.

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By cfield
08th May 2024 11:58

I'm surprised that someone posting regularly on here would even ask that question. Clearly you know very little about how the contractor market works.

The reason umbrella companies exist is because neither employers nor agencies want contractors on their payrolls. That's because they don't want the onerous responsibilities of being employers, which go a lot further now than the PAYE obligations, and who can blame them?

Not all umbrella companies are rogues. Indeed, most stick to the rules, but unfortunately there are loads of bad eggs. In my view, HMRC haven't done anything like enough to enforce the powers they already have, nor have they employed much intelligence in cracking down on widespread and well known malpractice. This smells like yet another sledgehammer to crack a nut.

They could have rooted out all these fraudulent schemes and the agencies who facilitate them years ago. Some of these agencies specialise in the public sector and are very well known. They've been getting away with it for years, shunting unwitting workers (who are pretty much forced to work through them by NHS Trusts and Local Authorities) from one dodgy umbrella to the next. As Sandnickel says, these firms are not innocent. They are facilitators and it should not take much to prove that.

All HMRC had to do was use issue Information Notices (or threaten to), find out who the preferred suppliers were and then send out small teams on targeted PAYE inspections. They could have then come down like a ton of bricks on the fraudsters and nipped these schemes in the bud. Instead, they prefer to hound the locums and other workers with threatening letters, many years down the line, blaming it all on them. In some old cases, they even roll out the infamous loan scheme rules, hitting people who often knew nothing about them.

In my experience of handling such cases, many of these workers did come to realise that something smelled bad, but getting out of these schemes is like trying to get out of a venus fly trap, especially when the agency staff, who they should be able to trust, keep soft-soaping them that everything is OK and that these "enhanced payroll models" are "HMRC approved".

I dislike the term "tax avoidance" when used to describe these nefarious schemes. Tax avoidance is perfectly legal. Indeed, not just legal but totally above board. These are not "defeated tax avoidance schemes" because they were never tax avoidance in the first place, just downright fraud dressed up as tax avoidance. The fact that HMRC has finally got round to defeating them does not mean they were OK until then. It means they were frauds all along, and clearly so, to anyone with eyes to see. Unfortunately, those eyes were too often filled with pound signs.

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David Ross
By davidross
09th May 2024 09:56

Thank you putting this so well

"If only" HMRC did its job

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By FactChecker
09th May 2024 13:01

I too am surprised ... that you felt the need to preface an otherwise reasonable post with an unnecessary (and inaccurate) couple of sentences about me.

FWIW I have a lot of experience of "how the contractor market works" - albeit less so in the last decade.
And from both ends of the supply chain and points in between - having been a contractor (as employee of an agency) and then (still via the agency but as a PSC) in the '70s ... running an agency (albeit more head-hunting than temps) at the start of the '80s ... and at the start of this century developing an integrated recruitment/employment/timesheet/payroll/invoicing/accounting system for one of the largest UK suppliers of 'temp' teachers.

The reason I asked the question is precisely *because* of all that knowledge - in that (if you've read my other posts on this subject) you'll see I've been making the same point that you finally arrived at. Namely that it's really not hard to detect when fraud is in play (as the core of the 'offering') - so why not go after the end client (who enabled it) rather than the end employee (who had little choice if they wanted work)?

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Replying to FactChecker:
By cfield
09th May 2024 15:53

Yes, but you asked what good reasons there were for using umbrella companies and came to the (your words) cynical conclusion that they were just to hide reprehensible activities. Anyone who has worked as a contractor, or for contractors, over the last 20 odd years should know that they are an unfortunate necessity brought about by IR35 and increasingly burdensome employment legislation.

It sounds like most of your experience of that particular market was back in the 20th century when agencies were happy to run payrolls, PSCs were the free choice of the contractor and there was no IR35 at all let alone the savage version we have today. No doubt you did sterling work back then, but you haven't really kept up, have you? Hence your (again own words) naive question.

Your subsequent question is certainly worth asking (and best by a Parliamentary committee). Unfortunately the answer is highly likely going to be the usual one; i.e., useless people, both at the top and bottom of HMRC, lacking the wherewithal, intelligence, proactiveness, wisdom, and sheer common sense to think about the problem logically, devise appropriate solutions and carry them through. Was there anyone at HMRC who could have switched on their computer one morning, googled umbrella companies, seen all the websites brazenly offering 90% net pay and thought "Right, let's send someone round to have a look at them". Are you even allowed to do things like that at HMRC? What, nobody?

Venturing even further into the realms of fantasy, was there anyone at the top end of HMRC who might have pondered "Hmnn, these new IR35 rules, contractors are going to end up being herded into umbrella companies. We already know there are some dodgy ones about. How are we going to stop them preying on the locums and costing the Exchequer shedloads of tax/NI in fake remuneration schemes?"

These people are just so spectacularly useless it's enough to make you want to cry.

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Replying to cfield:
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By FactChecker
09th May 2024 18:53

If you're going to quote someone's words back at them, it would be nice if you took the care to do so accurately.
I didn't say "that they were just to hide reprehensible activities" ... close but no cigar due to your insertion of the word 'just' (as in solely) ... whereas I said "they're (often/mostly) used quite deliberately "to 'hide' reprehensible activities at one remove".

That may feel like semantics to you, but it's a really important difference that illustrates why you maybe didn't grasp my initial question.
'Solely'/'just' would mean that there are no legally operating Umbrella companies - which I never said or even remotely suggested.
'Often/mostly' however was the heart of my question - in that it suggests exactly the point that you keep making (and with which I agree) that the frequency (and overtness) of the fraudulent behaviour should make it hard, if not impossible, for the client company to claim ignorance of what was going on.

Anyway, I'll move on as I've no interest in chomping down on your patronising comments ("No doubt you did sterling work back then, but you haven't really kept up, have you?") other than to say that's not the way to influence people or get changes made. Fresh pastures await my attention.

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