Skating around the edges and wishy-washy, it’s HMRC's new umbrella company guidance for agencies
Hot on the heels of missing one opportunity with its new IR35 off-payroll guidance on contracted-out services, the government has effectively now doubled up by missing another opportunity, with new but equally inadequate guidance for agencies using umbrella companies, writes John Bounds, a director at payroll services specialist AGPayroll.
The five-page guidance, ‘Responsibilities for employment businesses working with umbrella companies,’ was a perfect opportunity for HMRC to give the recruitment industry some much-needed, practical assistance in and around the usage of umbrellas.
The guidance could have lent towards defining what an umbrella company is (even a working definition would have sufficed), to potentially lay the foundations for the massively overdue legislation to regulate brollies.
All compliant umbrellas want this legislation, so the non-compliant brollies can be weeded out. It all rather begs the question of why HMRC hasn’t done anything in this direction -- or even actively stopped the non-compliant providers. Instead, with this guidance-publication, the Revenue has just rolled out the usual wishy-washy wordage, and it doesn’t give any more guidance since its last update only a month ago.
What does HMRC actually say in its new guidance for umbrella-using agencies?
The new umbrella company-related guidance for employment business:
- Outlines the responsibilities for employment businesses collaborating with umbrella companies.
- Claims to provide comprehensive details regarding the obligations that employment businesses have when engaging with umbrella companies.
- Loosely covers aspects such as conducting ‘due diligence’ when selecting an umbrella company; ensuring compliance with employment legislation, making transparent agreements with workers, providing necessary information, and taking responsibility for ensuring workers' rights and protections.
- Emphasises the importance of clear communication, proper documentation, and adherence to legal obligations to safeguard the interests of both employment businesses and workers engaged with umbrella companies.
Fetch your skates; HMRC has…
TL;DR? Well, if those above four bullets are too much; fear not -- I’ll sum it up for you:
This new HMRC guidance skates around the edges and doesn't give any new detailed direction or practical guidance!
In fact, if you’re an agency, you’ll be left with the impression from reading the guidance that HMRC is saying; ‘You had better get the process of working with an umbrella correct because if you don’t, we’ll come after you.’
Unfortunately, the detail on what practically ought to be done -- to get working with an umbrella company right -- is scant. But the guidance essentially signals to agencies; ‘It’ll be your fault if you get it wrong.’
In my experience, agencies know they must do their ‘due diligence’ and keep the proof that they run such checks, even if the burden of proof is placed on them. For example, to mitigate the risk of HMRC liability, the agency must take active steps to ascertain if the umbrella is operating a tax avoidance scheme. As I’m sure the Revenue recognises (privately at least); one of the very last things most underhand umbrella companies will do is tell you they are running a tax avoidance scheme!
The ‘right-wrong’ payslip thing is what compliant brollies are being asked to do
In the contract market right now, I’d wager that most compliant umbrella companies have been asked “Do you, or can you ‘do,’ the model that churns out a compliant-looking payslip, even though it’s not, technically, HMRC-compliant?”
The nursing sector is among the big users of this ‘looks compliant-isn’t compliant’ model. In the sector, there’s quite a lot of pressure to do this ‘right-wrong’ payslip thing. One agency has told me that if they don’t offer this non-compliant model, there are many other agencies that will. With this agency, there’s a feeling that they must have a percentage of their business through this right-wrong model, because nurses wanting a decent take-home pay won’t work any other way.
The nurses? They’re in on it
In that sense, the nurses are ‘in on it.’ They know that, if a consultant spied the payslip from this model, it LOOKS compliant; it LOOKS like the right deductions have been taken. But as looks can be deceiving (and indeed, in this case they are), this one payslip could leave the directors of the agency liable. In such an instance, HMRC could use their transfer of debt liability powers, and issue the directors with personal penalties, totalling to what the company owed. And yes, this consequence of personal HMRC liabilities has actually happened already!
The government could have taken this publication opportunity to unveil guidance that at least addresses some of these very real and troubling issues.
‘Agencies must be compliant.’ Hardly guidance, is it?
Instead, the new HMRC guidance almost just states the obvious when it gets near the tricky issues.
“You must,” it instructs agencies, “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.”
The guidance also dictates to agencies that they “must…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.”
Umbrella regulation using recruiters, the ‘reactive’ future
Meanwhile, the now-closed umbrella company regulation consultation indicates that the government is looking to go down the route of placing the responsibility of ensuring brolly compliance squarely on the shoulders of the agency.
This responsibility will then be checked and enforced by the Employment Agency Standards (EAS) Inspectorate, it seems. My fear is this will represent more of a ‘reactive’ compliance route, meaning EAS will wait for a complaint about a certain umbrella (or their model) -- and only then look into it.
In reality, the only way the officials would know about a dodgy model at the time, would be if a candidate raised it with them directly – not that I imagine many candidates will know who the EAS are! An agency informing the EAS of a ‘model’ could be a thing of the future however, especially where that agency doing the informing cannot compete with another agency due to the charge rates facilitated.
‘Can you do the payslip thing that dodgy brolly ‘x’ does please?’
Even preparing agencies for making them the umbrella company ‘police’ of the future would have made this new guidance from HMRC more adequate than it is. But the government’s umbrella-regulation approach of enlisting them as enforcer rather implies agencies themselves to be whiter than white. Well, HMRC if you’re reading, the most galling thing about the nursing sector ‘issue’ outlined above? Simply, it’s that in a similar case, the agency was actually heard saying, ‘Can you please do the [insert name of well-known rogue umbrella company] dodgy payslip model which they do?’ Next time HMRC, cover that in your guidance.