How to protect your employment business, and the workers you supply, from non-compliant businesses in your supply chain.
As an employment businesses (sometimes called a recruitment agency) you find workers for other businesses (sometimes called end clients).
You may use umbrella companies to employ those workers. The umbrella company will usually be the worker’s employer and is responsible for:
- paying the worker’s wages
- operating PAYE as part of their payroll
While many umbrella companies operate legally and compliantly, some do not. They may not pay all the money owed to the worker or to HMRC.
Working within the law
As an employment business, you must comply with employment and tax law when working with umbrella companies, including requirements for:
ensuring agency workers are treated no less favourably than comparable permanent staff in the Agency Workers Regulations 2010
submit the quarterly employment intermediaries return for workers you place with end clients where you do not operate PAYE including umbrella company employees
operate PAYE where the workers you supply to a UK end client are employed by an overseas employer such as an umbrella company with no UK presence, under the rules for offshore intermediaries unless someone else operates PAYE on your behalf
follow the VAT requirements for operating self-billing with an umbrella company
pay tax and any National Insurance contributions on any cash incentives or rewards your employees receive directly from an umbrella company
include incentives or rewards your business might receive from an umbrella company, like payment for inclusion on a preferred supplier list, as part of taxable income or profits under the rules for income tax and rules for Corporation Tax
prevent illegal working, including checking that umbrella companies are carrying out and recording right to work checks on temporary workers, as set out in the Immigration, Asylum and Nationality Act 2006
not agree to or accept gifts including money which encourage any part of the supply chain to perform their functions or activities improperly or rewards them for having already done so, as set out in the Bribery Act 2010
Workers can find being employed by an umbrella company confusing and working for a non-compliant umbrella company can cause them problems. Supporting workers can mean you’ll receive fewer queries, improve compliance in your supply chain and help protect your business’s reputation.
Explain how the worker will be employed
Explain how the umbrella company employment arrangement will work to the worker, as well as any other options for arranging employment that might be available to them, so that they can decide if it’s right for them.
You should share information on working through an umbrella company with workers. This will help workers understand employment rights and tax responsibilities.
Be clear about pay rates
Be clear about pay rates when you advertise a job and when you discuss roles with prospective workers.
You should be clear that:
- the assignment rate (sometimes known as the contract or uplifted rate) is the rate that you will pay the umbrella company not the worker
- the worker’s gross pay will be less than the assignment rate
Issue Key information documents (KIDs)
KIDs need to to be issued when workers first register with you, before you provide any work-finding services. They must be updated and reissued when there are significant changes.
Some umbrella companies will have created KIDs for employment businesses to use. However, it is always your responsibility to issue KIDs and this cannot be deferred to a third party like an umbrella company.
Before a Key information document is issued make sure:
- it contains the name of the umbrella company
- it is clear, accurate and covers only the required information
- any information you need to complete the KID has been obtained from the umbrella company in writing
- that you have a process for getting updated information from the umbrella company when things change
For support completing a KID contact the Employment Agency Standards Inspectorate (EAS).
What happens if you work with umbrella companies that do not follow employment and tax law
There can be serious consequences for your business if you are involved in non-compliant supply chains and do not take reasonable measures to avoid this. A non-compliant supply chain might include umbrella companies who do not follow employment and tax law.
In most circumstances, claiming that you were not aware of non-compliance is not a defence.
If HMRC investigates and finds you are involved in non-compliant supply chains, we may take action. This includes but is not limited to:
prosecuting you for failure to prevent facilitation of tax evasion in the supply chain
denying your right to recover VAT input tax and issuing penalties if you knew or should have known you were connected to VAT fraud
issuing an enablers penalty if you use an umbrella company that is operating tax avoidance or if you have been involved in designing, marketing or facilitating another person to avoid tax
publishing details of those involved in tax avoidance schemes including promoters, enablers and suppliers and details of deliberate tax defaulters
The Employment Agency Standards Inspectorate can:
close businesses and ban directors and others from running an employment business and publish their details where they breach the Employment Agencies Act 1973 or other relevant legislation such as the Conduct Regulations 2003, due to misconduct or unsuitability
The Gangmasters and Labour Abuse Authority (GLAA) issues penalties for criminal offences under the Gangmasters (Licensing) Act 2004, including those who use unlicensed umbrella companies in the sectors covered by the GLAA.
If HMRC, the EAS or GLAA take action against your business, it can damage your business’ reputation and ability to secure and maintain contracts and business relationships with end clients and workers.
Protecting your business
To protect your business you should understand your supply chains and take action if you spot non-compliance.
It is your decision whether to work with an umbrella company and you should not do so if you suspect they are not compliant, even if a worker requests it.
Only use umbrella companies that you have carried out due diligence on.
- identify the entities in your labour supply chain
- understand how workers are being engaged and paid
- assess and reduce any risks of non-compliance
The checks you undertake should be regular, reasonable and proportionate for your business.
You should keep a record of the due diligence checks that you have undertaken on an umbrella company.
make sure that if workers ask to work through a particular umbrella company, this is not because increased take home pay or additional untaxed payments they have been promised by the umbrella company, which can be signs of tax avoidance
find out if the umbrella company is outsourcing its employer responsibilities to a third party, and do due diligence on that third party
check the umbrella company is VAT-registered, charging VAT, and the details provided by the umbrella company match
get reconciliation statements directly from the worker (where they have them) to check the assignment rate matches the money you have sent to the umbrella company
get payslips directly from the worker to check the umbrella company is acting as the employer and operating PAYE
check the name of the umbrella company corresponds with the bank details provided by the umbrella company
check the umbrella company has the required insurance including employers liability insurance
check the accreditation status any umbrella company claims to hold with the relevant body
check whether the umbrella company holds a GLAA licence on the GLAA website if it operates in a sector covered by the GLAA
Umbrella companies can be involved in many forms of tax non-compliance and there are checks you can carry out to identify them.
- help you to apply due diligence to assure your labour supply chains
- prevent criminal facilitation of tax evasion
- reduce the risk of using an umbrella company that operates a tax avoidance scheme
- protect your supply chains from mini umbrella company fraud
Signs of mini-umbrella company fraud can include:
- regularly having to reissue KIDs to workers because the umbrella company keeps changing
- differences between the employer’s name on the latest KID and the latest payslip
- frequent changes to the PAYE reference number which may be included on payslips
Your end client may also want evidence that the umbrella company is the employer and operating PAYE to ensure compliance with off-payroll working rules. You should share this if asked.
Reduce your risk
Structure your supply chains in a way that is easy to understand. You can do this by keeping your supply chains as short as possible. This makes it easier to carry out due diligence and lowers the risk of non-compliance further down the chain, particularly by fraudulent umbrella companies.
Give your staff training to help them identify non-compliance within your supply chains and have clear procedures on how to report it.
If you think that an umbrella company in your supply chain is operating non-compliantly report them to their accreditation body if they belong to one.
You can report concerns about pay and work rights including National Minimum Wage, employment agencies, gang masters, or working hours.