Like your lunch, contractors, with umbrella company payroll services there’s no such thing as free

It’s a truism of life that nothing comes for free, informed by the old adage ‘There’s no such thing as a free lunch,' and that certainly applies to umbrella company payroll services, writes Emma Naylor, director of agency sales at Caroola Group's Parasol.

'Free Payroll Services' are a hook to avoid

Nonetheless, there is a scourge on the umbrella sector, with companies right now posing as legitimate ‘umbrella’ companies but that are not actually doing what ‘umbrella company’ says ‘on the tin.’ These spurious brolly operators seem to be out in force without blushing, often openly using every trick in the book to try and take advantage of unsuspecting contractors.

These operators are using enticers like the promise of “free payroll services” to land custom. So contractors need to be on their guard. Make sure you do your ‘due diligence’ before agreeing to any sort of relationship.  

If you’re not paying for the product…

Remember, while nothing comes for free, these operators will be making money in some way in order to be commercially viable. As another saying goes, ‘If you’re not paying for the product, YOU  are the product.’

One way they try to make money is to withhold money from your pay that should be going towards HMRC, to cover the tax and national insurance contributions of the contractors they work with.

Liability when using an umbrella company

A key point to remember, though, it is always the contractor who is liable for any money owed to HMRC.

Unpaid tax bills will always see HMRC pursue the contractors and not the providers – and these operators can and do unfortunately disappear just as quickly as they pop up!

Worryingly, I have seen cases where HMRC has come after contractors four or five years down the line. So tax consequences are often not felt initially or for some time. But usually after a few years, these companies have completely disappeared without a trace.

How are these brolly operators getting away with this?!

There are a number of ways these companies are taking advantage of contractors right now. Pay Per Click (PPC) advertising is a big one and the use of search engines like Google can be a honey trap -- particularly with the promise of things like “free payroll services.” Often, these operators might appear as some of the first search results that come up when searching online for an umbrella company.

But sometimes, it can be through brokers or word-of-mouth referrals from other contractors who genuinely believe they are onto a good deal.

Recruiters too need to be mindful of who they recommend to contractors and who makes it onto their Preferred Supplier List (PSL).

Agencies must make sure they are aware of these types of operators and the potential risk they pose to their clients. Many contractors will take the recommendation of a recruiter as gospel, so there is a duty of care here that must be upheld by individual agents.

All that glitters may not be gold

The websites of the operators are also designed to win trust with messaging like '100% compliant' or even 'HMRC approved' to dupe people into singing up. Please be aware, ‘HMRC-approved’ simply does not exist, as HMRC does not grant its approval to umbrellas.

It’s also true that these types of ‘brollies’ have always been a problem but right now, with the cost-of-living crisis putting an additional squeeze and pressure on household incomes, it's creating a situation that they are attempting to take full advantage of.

Hard-pressed due to the current climate, to some workers these schemes might look appealing.

A few contractors are asking for trouble

Yet not everyone is a mark. Although many contractors falling foul of these schemes are very innocent, there are some that are actively choosing umbrella companies that they know are not fully compliant. This is a huge risk as those that know the potential downsides really are playing with fire and won’t have anyone’s sympathy.

The fact it would be them as the party fully liable for the tax they owe to HMRC - sometimes even many years later – is important to remind these individuals of. Indeed, what contractors often think or get told will be saved in tax on their take-home pay, can later get more than wiped out by the tax bill.

What should contractors look for?

HMRC are trying to close loopholes and do publish an official list of avoidance scheme firms that contractors should not work with. That said, this resource is by no means a comprehensive list.

However, contractors should be aware that because of UK laws under the Finance Act 2021, after 12 months, entries on the list must be removed. This is a huge problem as the removal risks giving contractors the wrong idea. My hope is that this 12-month expiry in the legislation can be re-looked at by HMRC and corrected by HM Treasury.

Something else we’d advise contractors to look out for? Accreditation by the Freelancer & Contractor Services Association. This is one of the gold standards in the umbrella employment sector, and firms with an FCSA badge are showing that they are serious about compliance. My take on being an FCSA member is that it’s definitely a trust signal worth factoring into any decision-making you do as a contractor.

However, FCSA is a membership body, and there is still no government-led regulation of the umbrella sector. Regulating umbrella companies is something we believe is still very much needed and would be very welcome.

How should contractors approach umbrella companies in 2023?

Working through the complexities of all of this is very difficult for contractors to navigate, with lots of factors to consider. My recommendation is that you really take the time to decide which PAYE umbrella company provider to work with; do your research carefully, and don't be afraid to ask lots of questions.

Start by asking your agency whether they have a PSL in place; what due diligence they have carried out and whether their providers have any kind of compliance accreditation or audit standard.

Next, speak to those partners, review your Key Information Documents and any additional take-home pay illustrations or breakdowns you are given by your prospective payroll company. If you are already working through one, there are good companies out there that can check your payslips in real-time to ensure everything looks legitimate and as it should be.

Be in no doubt, there are many good umbrella companies out there that will give you the support you need while contracting. However, it’s important that you avoid companies that can’t explain why your take-home via them is higher than normal (the only difference between compliant providers is the margin), or how they can afford to pay you for ‘free’ and those who can’t provide you with illustrations and payslips. If you’re stuck or still unsure, the FCSA website is a good place to start as members are regularly audited to ensure compliance.

Final thought

Bottom line? There’s no such thing as a free lunch, and no such thing as a free payroll service that won’t come back to bite you! If your take-home is similarly too good to be true then, to avoid a nasty tax bill later down the line, take stock and look instead for a compliant and trustworthy payroll solution. When it comes to managing your personal tax contributions and ensuring compliance with HMRC, do it right first time with an umbrella company that doesn’t need gimmicks, to ensure potentially devasting tax consequences for you -- and you alone -- are avoided.