The power to starve tax avoidance schemes blacklisted by HMRC is in contractor recruitment agencies’ hands

Accountants, contractors, umbrella companies and even HMRC. They’ve all had their say about the tax office’s avoidance blacklist, rechristened last week as a ‘naughty list.’

But the silence from contractor staff suppliers in response to the online HMRC resource is as odd as it is deafening. My view is that if us recruiters did the very basics, the absolute minimum, these avoidance schemes could be starved of contractors and almost closed overnight, writes Matt Collingwood, managing director of IT recruitment agency VIQU.

Recruitment companies are the party in the supply chain which invariably either introduces a scheme to workers or signs contract agreements with them. And by ‘them,’ I include schemes dressed up as legitimate umbrella companies when actually, they’re anything but legitimate umbrella companies.  

Agencies – take accountability, YOU are often the enablers  

Call it whatever you like, HMRC’s avoidance blacklist raises a number of questions not altogether easy to answer, especially if you’re a first-timer contractor or newcomer to the contractor industry.

For example, why would a recruiter introduce a tax avoidance scheme to a worker?

Well, most likely, the answer is ‘Greed.’

At the time of writing, I get approached by parties who claim to be a bonafide umbrella and/or payroll company every working day. A few of these operators will offer payments for introductions made. These sums can start at £5 per week, per worker, and this sum (I’m told), would be pre-loaded onto a Mastercard!

Perhaps £5 doesn’t sound like much. But over a 12-month term, some recruiters might be £250 better off as a result. Multiply that figure by 200 workers (which is not unrealistic if you’re an agency with good clients), and you’re looking at £50,000 -- cash -- a year.  

Please don’t misunderstand me. There are many great, reputable, and customer service-focused umbrella companies out there today in 2023, operating in accordance with HMRC and the Department for Business & Trade. Our agency is proud to work with a few of these legitimate umbrellas.  

Enablers of avoidance are in the taxman’s crosshairs

But to recruiters who think that whatever’s out there, or whoever’s out there, isn’t their concern or problem or their look-out, I suggest you take note! The Revenue is seeking to pursue ‘enablers’ of tax avoidance. Scarily for you, the term ‘enabler’ is intended to include “anyone in the supply chain who benefits from an end-user implementing tax avoidance arrangements”.  So to such recruiters I say this -- by marketing these arrangements and making these introductions to contractors while you or your business benefits, YOU are complicit in tax avoidance. My belief is that recruiters should put ethics and the worker first, and if they are making an introduction, it should be a compliant introduction.  

What does ‘due diligence’ look like?

Just so you are aware contractors, each recruitment agency should have a list of umbrella company providers they have assessed. The minimum ‘due diligence’ which recruitment agencies should conduct is to see worker payslips to ensure the correct tax and NI are being deducted, and to then spot-check these throughout the term of the assignment.

My own due diligence also includes a mystery shopper-style phone call, with me on the phone to the umbrella playing the role of a someone new to contracting. If the umbrella company uses the call to mention any payments outside of PAYE, the company gets red-flagged, meaning we won’t deal with them.

Recruiters and contractors hoping to stay compliant during their usage of an umbrella company should look out for accreditation, with FCSA and Professional Passport being the two most well-known umbrella accreditation bodies. Although these bodies aren’t compulsory to join, those umbrellas with active accreditation from either will have undergone a thorough compliance check. We believe such accreditation offers some peace of mind that the umbrella it’s attached to plays with a straight bat.   

Leopards on Companies House don’t change their spots  

Check Companies House if you’ve still got concerns. My own frequent searches of publicly available information on Companies House does raise our agency’s eyebrows over the conduct of some of the directors attached to companies on HMRC’s avoidance blacklist.

A common theme is that some of these directors have opened and liquidated limited companies on a frequent basis. I’m not saying that liquidation is a red flag -- after all, the process of liquidating is intrinsic to the limited company model. But when directors allow multiple companies to ‘go to the wall’ and do so often, it’s very difficult to expect they will pay future workers correctly. If at all.

The Companies Act sets out director obligations pretty clearly. Yet I would like to see clearly shady directors ‘named and shamed,’ further to them potentially receiving lengthy disqualifications from running a limited company, or even owning shares in a limited company.

But here’s a warning. Companies House shows at least one of the directors of a company added just last month to HMRC’s avoidance blacklist has launched other companies. So be careful, because surely; we can expect to see more entries on the list and soon?

To the director who I’ve got in mind who clearly doesn’t have contractors’ livelihoods in mind, they should be aware that HMRC has repeatedly said that schemes like theirs don’t work. Why do some individuals still think they can get away with running, introducing or even using these abusive schemes?

Questions (and concern) for contractors

Perhaps the sheer demand for these ‘solutions’ which deprive the exchequer is part of the problem. Contractors have been pushed and squeezed from every angle in recent years. Too many are still forced into taking ‘on-payroll’ assignments, often due to the ignorance of blanket inside IR35 decisions by clients. We’ve seen a cost-of-living crisis intensify and some contractor pay rates haven’t kept up. The market has also slowed a little over the last six months. With all these pressures, I understand why some might want to work through an ‘umbrella company’ that offers a take-home pay booster.

But outside of the weekly fee an umbrella company charges you for their services (their margin), there isn’t anything they can (lawfully) do to influence or increase a contractor’s take-home. If they do claim a high take-home, (85% is still being touted without so much as even a blush) it’s highly likely to be a tax avoidance scheme.   

The sad truth is that I have spoken with numerous contractors over the years who have been caught out by crooks running poorly managed umbrellas or pedalling outright tax avoidance schemes.

One seasoned contractor who was willing to disclose to me details of his personal bankruptcy says he has “lost everything”, including his home. The stress of it all was responsible for the breakdown of his 22-year marriage, he says. When I hear of misfortune such as this, it angers me -- that it continues to happen; that recruitment agencies are burying their heads in the sand and unscrupulous directors are setting up imposter umbrella companies and wrecking hard-working contractors’ lives.     

Why does this keep happening, and why are we not holding those in the supply chain to account? 

How to deal with an unknown umbrella

Well, if you’re a contractor recruitment agency determined to make a difference, remember that if worker asks to work through an umbrella company unknown to you, then your recruitment agency MUST conduct its ‘due diligence.’ And if there are doubts, your agency should decline to contract with that umbrella company. It’s as simple as that.  

If you’re a worker who has an umbrella company declined, your agency should offer fair and detailed reasons for their decision. Remember, it’s highly likely they will be doing you a favour if the umbrella is non-compliant!

The above sort of guidance from me and others is necessary because there isn’t a specific regulatory framework governing umbrella companies -- unlike recruitment agencies who must adhere to The Conduct of Employment Agencies and Employment Businesses Regulations 2003.

The future

Instead, it’s still up to umbrella companies to self-adhere to the spirit and the letter of the law when it comes to decent and honest conduct. Although many reputable umbrellas have been pushing to drain the swamp of corrupt, unlawful ‘umbrella companies,’ the government has been slow to act. However, in 2021, the government conducted an umbrella market call for evidence, and a consultation with ‘clean-up’ proposals is now available. To reassure you, many of us good agents are quietly confident that positive change will come from this consultation and finally, FINALLY, we should soon see legislation to close down dubious umbrella companies and open the era of umbrellas we can be universally proud to call our partners.