The contractor market was rocked this month by allegations that several umbrella companies are skimming from the salaries of their workers through unspecified “employment costs.” This situation has come about through a combination of bad actors, lack of transparency and badly designed government legislation, but as usual it’s agencies who find themselves trapped in the middle. So, what can be done to avoid reputational damage and compliance risk created by suppliers?
Umbrella companies have been around for decades, but the off-payroll working rule changes in 2017 and 2021 have driven more contractors and agencies towards this solution for contractors working on “inside” IR35 assignments.
The common misconception is that using an umbrella company outsources all of your responsibilities to this supplier as the employer. As we shall explore, this is not always the case, and while the market remains unregulated and populated by some bad actors, the risk to agencies and their clients from unethical or non-compliant practices remains high.
For contractors, the primary pain point is the operation of payroll. When it comes to payroll, it’s not just hidden skimming charges to watch out for but an assurance that other requirements such as holiday pay and expenses are being managed fairly and legally.
If you refer your contractors to suppliers who neither pay them correctly nor on time, it’s not just the umbrella company that your contractors could take issue with — they may also call out their agency and end hirer. If your talent pool then walks, you may find yourself struggling to access the best talent, turning a reputational risk into a commercial one.
Hidden Tax Liabilities
For end-clients and agencies, hidden tax liabilities are the greater financial risk. There are already 19 “named tax avoidance schemes, promoters, enablers and suppliers” which have been posing as umbrellas listed on HMRC’s website, but this is just probably just the tip of the iceberg, as it takes time for an HMRC investigation to come to be prosecuted.
Also, remember that under the new IR35 rules, HMRC may deem either the agency or client to be the party ultimately responsible for repayment of unpaid tax and associated fines, but it could be years before any non-compliance is uncovered.
Corporate Responsibility for Suppliers
Under the 2017 Criminal Finance Act, “failure to prevent the criminal facilitation of tax evasion” is a prosecutable corporate criminal offence. This legislation has been specifically written to encourage due diligence to be exercised on business partners and suppliers and carries an unlimited fine.
HMRC recently announced that it has 28 live cases or opportunities under review, spanning 11 sectors including labor provision. The risk of being caught up in one of these extends beyond just HMRC’s penalty — the reputational fallout for ignorantly passing this risk onto clients would be considerable, and the damage to shareholder value should also not be overlooked.
Due Diligence and Preferred Supplier Lists
Whilst swift action to remove umbrella companies from PSLs is necessary when malpractice has been identified, it is just damage limitation. The proactive solution is to conduct regular due diligence on all PSL suppliers and adopt a partnership approach with clear contractual requirements in place.
An umbrella company holding an accreditation or any other form of external validation doesn’t look like a risky bet on paper, but recent revelations serve as a timely reminder that due diligence is an active and ongoing process that you are ultimately held accountable to.
The government published some helpful guidelines for labor supply chain due diligence last May. These include responsibilities for outsourcing payroll as well as obligations under the off-payroll working rules and a reminder of the applicability of the Criminal Finance Act to the sector. You can find a full checklist of due diligence principals on HMRC’s website.
It’s vital to ensure that you’re working in partnership with reputable providers who ensure transparency and compliance to the flexible workforce and your supply chains. Whether you’re looking to root out the weak links in your PSL or are interested in exploring more innovative alternatives, it is essential that you own and undertake your own due diligence to limit the chances of these risks materializing.