Five reasons why contractors should get behind HMRC’s new umbrella companies guidance for agencies

The UK government published on November 30th some updated guidance aimed at helping recruitment agencies understand their obligations around hiring temporary workers through umbrella companies.

As a compliance organisation, we believe that this latest HMRC guidance casts an important spotlight on helping workers navigate the complexities of the umbrella industry, writes Crawford Temple, chief executive of Professional Passport.

1. First, it’s good for forbidding agencies from washing their hands

An umbrella company functions as the official employer for contract workers hired by an agency for temporary assignments. The umbrella handles administrative payroll, tax, and compliance duties on behalf of the recruitment agency which allows the agency to offload its employer liabilities.

However, this new guidance makes clear that agencies cannot completely wash their hands of oversight duties when relying on umbrella employment arrangements. The HMRC guidance sets explicit expectations around pay rate transparency, proper information disclosures, and ongoing payslip monitoring.

2. Second, the HMRC umbrella guidance makes clear pay rates must reflect true costs

The guidance unequivocally states that agencies must accurately calculate and convey pay rates to reflect actual costs and margins. All too often, agencies only advertise the basic salary rate to workers rather than the full rate, leaving employees confused about their take-home pay.

Going forward, agencies must clearly spell out the gross salary, employment expenses, umbrella fees, and ultimate net wage the worker will receive through the Key Information Document. The total gross rate remitted to the umbrella company is dubbed the “assignment rate” and must form the basis for pay discussions with workers.

3. Third, HMRC acknowledges the right to reject umbrella employment 

The guidance also makes clear that forcing a worker to join a specific umbrella constitutes an illegal employment practice. Although an agency may only offer umbrella-based contracts, the worker retains the right to pursue employment through alternate channels.

This basic acknowledgement of employee choice (“Other options…that might be available to them, so that they can decide if it’s right for them”), is rather overdue but welcome. For too long, many recruiters strong-armed contractors into questionable umbrella arrangements.

4. Fourth, legally-required information disclosures, like KID, are now in black and white

In a similarly laudable push for transparency, the government demands employment agencies to provide accurate paperwork from the outset of engagements.

The now-mandatory Key Information Document (KID) is reiterated in the guidance as not optional.

And as it’s not just a nice-to-have, I want to take some space here to remind contractors what they should be getting in their KID via their agent.

A Key Information Document, what’s the point for contractors?

The KID  must offer specifics around proposed wages, discounts, fees, taxes and net pay rather than boilerplate templates.

KIDs have been a legal requirement since April 2020 and were intended to be an important step towards greater transparency on the working terms between the contractor and hirer. Whether a contractor is paid directly, via agency PAYE, through an umbrella company, or their own limited company, the KID provides key details on pay rates, deductions, and more.

At predetermined points in the contracting process, it is the recruiter's responsibility to furnish a contractor with a complete and accurate KID.

At the point of registration, the agency should provide sample KIDs using a generic rate to illustrate all the ways a contractor could be engaged and paid if they took an assignment with the agency.

KID contents: What should a KID contain?

Once a contractor assignment has been agreed, an updated KID should spell out, in clear terms, vital details including:

• The Contract Rate – the pay specifics for that assignment.

• Deductions - The KID must describe any statutory deductions like income tax that will be taken out of pay. Additionally, non-statutory deductions and fees, such as an umbrella company's margin, need to be detailed. The KID can either list the precise amounts that will be deducted or explain the formula used to calculate them.

• Holiday Pay - How holiday pay entitlement is determined and calculated must be clearly outlined.

• Representative Example - To demonstrate how deductions will impact take-home pay, the KID should include a realistic ‘example-statement’ with actual numbers. This should show how the deductions listed will apply to a proposed gross pay rate.

• Updates - Whenever a ‘Material Change’ occurs, an updated KID must be issued to the contractor within FIVE working days. A change in rate is not considered a material change but where there are new deductions applying, such as Pension Auto Enrolment, an update will be required.

Workers should insist that they are given a KID by an agency when they start a new role.

5. Fifth, the HMRC guidance puts in writing the importance of regular payslip checks & reconciliation

Finally, the guidance is urging agencies themselves to review umbrella company payslips.

By comparing payslip data, tax filings and underlying assignment pay rates, agencies can spot warning signs like skimmed wages or tax avoidance schemes. 

Responsible agencies should be checking their umbrella partners as routine and should only be working with accredited partners that they know they can trust are operating compliantly.

That said, workers should not overly rely on agencies’ internal policing alone and should take responsibility for checking their own payslips, themselves!

One for luck: my bit of guidance, so contractors can check everything is present and correct

One way to monitor earnings is by signing up for a Personal Tax Account with HMRC.

With a Personal Tax Account, contractors can check that the earnings that are reported on their payslips are the same as those reported to HMRC, as the information is regularly updated following Real Time Information (RTI) submissions. 

What if your HMRC personal tax account shows discrepancies?

Any discrepancies would suggest that a contractor might be caught up in a tax avoidance scheme so contractors must conduct their own due diligence, be on their guard and be aware; including being wary of any provider offering TWO payments for each pay run, a.k.a. ‘the two-trick payment.’

Generally, the first payment will be applied at the National Minimum Wage and taxed through PAYE, and the second will have no tax applied and could be called a variety of names, such as an ‘advance’ or a ‘loan.’ These offerings lure the unsuspecting in with the promise of much higher-than-expected returns, often over 80% take-home pay but don’t be tempted.

WHEN (not ‘if’) these anomalies are discovered by HMRC it could be you, the contractor, who has to pay the missing tax that is owed. The net result will be that you will end up with less money in the long-term, than if you had opted for operating through a compliant provider.

For contractors, here’s the real value in HMRC’s ‘Responsibilities for employment businesses working with umbrella companies’

While the new guidance primarily addresses agency protocol (as its title suggests), it sends unmistakable signals as to questionable umbrella tactics that should outrage -- and forewarn -- contractors. Specifically, workers should vigorously vet recruiters, validate pay rates, research alternatives to umbrella set-ups and cross-check accounting.

By leveraging this newfound transparency and preventing umbrellas from operating unchecked, contractors can hopefully receive the honesty, choice and ethical treatment they deserve.

However, I would urge contractors to seize the reins and educate themselves about working through umbrellas and ask questions of the supply chain, so that they are comfortable with the umbrella working processes and assured that everyone in that chain is operating compliantly and in THEIR best interest.