Agency kickbacks: when contractors use their recruiter’s PSL umbrella company
With the public sector’s off-payroll rules being extended to the private sector from April 2021, many PSC contractors will find themselves moving to an umbrella company - possibly for the first time in their contracting career.
So it’s high time to delve into Agency Preferred Supplier Lists, Approved Supplier Lists and the relationships - plus the financial arrangements - that can exist between umbrella and agency, writes Crawford Temple, CEO of the largest independent assessor of payment intermediary compliance Professional Passport.
Firstly, it is important to establish that an agency can choose which umbrella companies they will deal with, and contractors will often be asked to select one of the preferred suppliers to work through. There are many reasons for this, as outlined by Carla Roberts of WTT Legal here.
What is an ASL?
Many recruitment companies will also operate an ‘Approved Supplier List’ (ASL), where contractors with existing relationships with umbrella providers can continue that relationship if that provider is on the agency’s ASL. Providers on an ASL should have a recognised compliance accreditation.
As the recruitment company has complete control over which umbrella companies they will deal with, commercial arrangements between recruiters and umbrella companies have become commonplace in the contractor market. Typically, a recruitment company and umbrella will agree an amount that the umbrella will ‘rebate’ back to the agency for each worker engaged through that agency.
Nothing new here
These arrangements started some 20 years ago with the introduction of self-billing. Where a recruitment company operated through a self-billing agreement with the umbrella company, they could save the umbrella company administrative time as the umbrella no longer needed to produce invoices.
As a result, many recruiters looked for some recognition of this saving and the fact that they were now doing that part of the work. In the early days, these agreements typically operated at around £2.50 per timesheet.
Over the last 20 years, this model has become more prevalent and more varied.
How much of a kickback per contractor?
Many responsible recruitment companies either do not take anything, or take a small amount in recognition of their increased workload and savings to the umbrella company. Then, there are a range of companies that look for anything between £5 and, at the extreme, £12-£15 per timesheet. In some cases, there may also be a lump sum payment made to secure a provider’s position on the PSL.
In addition, commission payments are being made directly to consultants for introductions to providers, the largest of these used by the ‘have I got a good idea for you’ schemes.
Recently we heard of £400 payments per successful introduction! With the compliant providers generally operating at charges between £10 and £25 per week, it is difficult to understand how commissions of £400 can be afforded.
One explanation is that securing a PSL place has become a priority for umbrella companies, in order to secure future business. Operating under the same tax rules, the difference in take-home pay is minimal, but may help to fuel the commissions.
For our part, we recognise that these arrangements are commercial agreements between the parties and therefore they fall outside general compliance standards. However, there are some important guiding principles that should be adhered to which contractors may be interested in:
- The preferred position for any agreement should be between the two businesses directly -- with formal invoicing for the agreed amounts.
- The amounts should be ‘commercial,’ by which we mean leaving a provider enough surplus income to fund their costs in delivering the services.
- If a recruitment company agrees that consultants can receive incentives then in all cases;
- the recruitment company must confirm this to the provider in writing
- any incentive must be paid with the provider covering the costs of basic rate tax and National Insurance
- the consultant must report their income on a self-assessment tax return and pay any high rate tax liabilities on the money received
- the recruitment company should implement adequate processes to confirm this to avoid potential future liabilities under The Criminal Finances Act.
Final thoughts (includes higher demands)
While many of the arrangements operated in the contractor market appear sensible and commercial, there seems to be a growing trend towards higher demands being made on providers in order to secure business.
At the time of writing, umbrella providers operating at the lower end of the charging scale are finding it increasingly difficult to secure new business as their fees do not allow for commission arrangements. Since it is the contractor who funds these, it is only fair to expect both the provider and recruitment company to declare what charges and commissions they are funding. Transparency is the key.