You probably won’t like my take on umbrella regulation if you’re an IT contract recruiter like me, but here it is…

I've heard the groans by many of my recruitment agency peers, and although I understand the sentiments behind the collective din, I actually support the prospect of making staffing firms responsible for umbrella company regulation, writes Matt Collingwood, managing director of VIQU.

From reading the REC’s take on brolly regulation and APSCo’s response to the proposals, my view puts me in a potentially unpopular spot, because unlike them our staffing business welcomes the likelihood of the legislative onus being shifted onto recruitment agencies.  

Us agencies could have nipped umbrellas’ shadiness in the bud yonks ago 

 The truth is this -- us recruiters could have nipped all the issues contractors come up against with umbrella companies in 2024/25 in the bud many moons ago. All it would have required was: 

1. ‘Due diligence’ on our part (not coincidentally this is the mechanism which the government now says it is “minded” to adopt), and;  

2. A simple set of standards for umbrella companies to adhere to (not coincidentally, a “manual” – at the very least – is being floated by some as necessary to accompany and inform the ‘due diligence’ requirement).    

Why umbrella company regulation is a job for recruiters 

 As contractors will attest, recruiters always dictate to those in their supply chain.  

They pick the clients they want to work with and they introduce the workers they believe are right. So why shouldn't a recruitment agency take ownership if they are allowing a brolly to sit between them and their worker? I'm tired of the recruitment agency market not taking ownership of something within its control.

‘Due diligence? It’s something recruiters should be doing already with umbrellas 

 Currently and for a while even, good IT contractor recruitment agencies operate to a ‘panel,’ which is a list of umbrella companies they have done their ‘due diligence’ on and are happy to put their name to. This is also known as a Preferred Supplier List (PSL). 

If a contractor wishes to work via an ‘off-panel’ umbrella (i.e. not a preferred supplier), then the recruiter has a choice to decline working with that brolly, or, as a staffing business, run its own fresh ‘due diligence’ checks on the umbrella company to check for compliance.   

‘Summer’ may have just got pushed back to ‘later this year’ 

According to the government’s April 18th 2024 regulatory update on umbrella companies, HMRC does not plan to release its new guidance until “later this year.” At Spring Budget, the guidance was promised for “summer 2024” – so it’s possible the guidance is now going to come later than first promised.

And that would be consistent. In fact, where I agree with my staffing and compliance sector counterparts, is with the assertion that brolly regulation has been kicked down the road by HMRC again and again, dangerously, and for too many years.

At present, nobody knows entirely what ‘due diligence’ might look like or in practice require agencies to do. 

Surely these are the six elements of HMRC’s ‘due diligence’ requirement… 

But a safe bet is to assume HMRC’s ‘due diligence’ for agencies using umbrellas will include six elements: 

1. Ensuring the brolly is paid into a UK-nominated bank account. 

2. Ensuring all funds due to the worker are paid PAYE. 

3. Ensuring no loans are paid. 

4. Ensuring the brolly is compliant on pensions.  

5. Ensuring the brolly is open to spot checks. 

6. Ensuring the agency requests copies of payslips as proof of compliant payments. 

Agents might groan at having to do these six but it’s possible they’re agency already does a few of them, or even all six -- we certainly have always hit these basics, and quite a few more!

So why are some staffing businesses unable to muster themselves to do the bare minimum, as a new requirement? It’s an odd one to definitively answer, because this six-fold approach shouldn’t be anything new to agencies, as it’s broadly the same approach as the off-payroll rules require.  

Some recruiters disregard ‘due diligence’ now, so how is HMRC going to fix that when it’s mandatory? 

Speaking for ourselves, our staffing operation has carried out some ‘due diligence’ which we know HMRC won’t expect, such as conducting ‘mystery shopper’ exercises. 

From experience, we’d also recommend credit-checking an umbrella company to gauge their financial stability, and also -- check to see if they have a disaster recovery process in place to ensure contractors get paid in the event of an emergency, including a cyber attack. 

Reassuringly, most recruitment agencies do run some sort of ‘due diligence’ checks on brollies they engage.  

But beware – this cautious and compliant approach isn't universal and the problem I have is that some recruiters don't take it seriously. And probably won’t take it seriously unless it gets put on the statute book. 

Key Information Document requirement still being routinely flouted 

Just to substantiate this point. I personally know of many recruitment agencies that don’t give out Key Information Documents, sometimes because they don’t actually know what a ‘KID’ is. By not issuing such a document to their contractors, these agencies are breaking the law.  

There are also agencies operating today that don’t have AWR processes for brolly workers. 

Finally, there are agencies (and their individual agents) who are referring brollies based on kickbacks and gifts. Today in 2024, even after the condemnation by MPs about fitted kitchens back in April 2021, I still get offered gifts from umbrella companies which would materialise in return for sending them business.  

One massive TV  = five recruiter-to-umbrella contractor referrals

This year, I’ve been offered a massive smart TV if I referred five workers to a single brolly. Of course, I flatly refused, as such decisions should be made on ‘due diligence,’ not shiny gifts.

Therefore my gut feeling is that even if ‘due diligence’ is passed into law, some agencies will treat it like other pieces of legislation (KIDs have been a legal requirement since April 2021), meaning they won’t upskill their workforce accordingly.

You might think I’m being dramatic about the extent of this problem with agencies complacent about compliance! But I see it regularly. Whenever I interview a senior recruitment candidate to join our agency, I throw in questions regarding KID, AWR and CEST, to see what they know. More times than I’d hope, these ‘senior’ recruitment professionals don’t have a scooby what I’m talking about! 

Will there be a due diligence requirement in the recruitment supply chain if these changes go ahead?  

Absolutely. Brolly workers make up about half of our working contractors. The alternative is to take those workers on as our employees on a PAYE basis. 

In doing so, we would be taking on significant further costs and potential employee-employer liabilities, which can sometimes lead to costly employment tribunals. Also, let's not forget, there are some amazing umbrella companies out there today, and these offer better payroll customer service than most agencies would provide by bringing PAYE in-house. Furthermore, good brollies are often overlooked for the value they offer in areas like pensions, health care, and mortgage advice.

The future

In the future and as an alternative, I foresee joint ventures between agencies and umbrellas, where the agency becomes the employer, but umbrellas offer the service to the agency, whereby they do payroll, customer care and the like, but ultimate liability sits with the agency. 

Assurances I’ve seen from Professional Passport and FCSA indicate such a set-up is a creditable expectation. Maybe these compliance organisations could scale an offering -- informed by HMRC’s incoming guidance -- for agencies similar to what they have done with brollies. 

Further HMRC considerations

With 30,000 recruitment agencies operating in the UK, I am intrigued to understand how HMRC plans to enforce any new regulations, such as the due diligence requirement. 

A bit like BEIS was tasked to enforce The Conduct of Employment Agencies and Employment Businesses Regulations 2003, it’s likely the taxman would outsource the enforcement of the umbrella sector ‘due diligence’ requirement to a third party. But would HMRC’s chosen enforcer (or even HMRC itself) have the ‘teeth’ to go up against so many agencies, or the stomach to -- given some agencies’ blasé approach to compliance? 

Where agencies are on surer ground to object to proposals in ‘Tackling Compliance in the Umbrella Company Market,’ is the potential pain any third-party debt transfer would cause i.e. if there is a shortfall of tax collected, the agency becomes liable. With so many small agencies in the UK, will we see a lot of phoenixes rising from the ashes? In other words, the agency receives a big, unpayable HMRC bill; closes on a Friday and opens with no debts under a new name on a Monday!

Lastly, there’s two lots of no excuses

Technology could be the solution here, and that’s likely why HMRC spoke on April 18th about a new payslip checker. The private sector is ahead in this area and maybe the taxman would do well to avoid a rerun of his much-maligned CEST tool experience. Either way, with online tools incoming if not already available to agencies (such as SafeRec), there really is no excuse for not making compliant payments to contractors. Then again, I’m seemingly pretty alone in also thinking there’s really no excuse for recruiters to not get behind the government bringing agencies into the legislative foreground to sort out ‘umbrella companies’ -- companies which when shortly defined by HMRC will surely inspire workarounds to the term. There’s another thing I won’t be popular for now uttering!