Umbrella companies play an essential part in the utilisation of temporary labour in the UK. They provide a platform for workers to easily and simply move from one temporary contract to another while retaining their employment status and employment rights. And they provide a support service that allows companies to utilise a flexible workforce without the costs and responsibilities associated with permanent employment.

For many businesses, the option to engage a flexible worker resource is integral to their success. However, there are risks associated with having umbrella companies within the supply chain.

What are the risks of using a non-compliant umbrella company?

The umbrella sector is largely unregulated and has, unfortunately, witnessed many cases where umbrella companies have been found to be abusing or evading the UK tax system.

The government’s response has been to introduce several pieces of legislation to eliminate such practices. However, to ensure effectiveness, the legislation includes clauses that delegate responsibility and liability throughout the supply chain, including end clients.

So, suppose an umbrella company is found guilty of tax evasion. In that case, it’s possible that the end client, irrespective of knowledge or involvement, could also be found guilty and liable for significant debts, fines and penalties.

Legislation, which includes the Criminal Finance Act 2017 and the Managed Service Company legislation, puts an onus and responsibility on end clients to conduct due diligence on companies operating within their supply chain. Failure to do so can result in end clients being found complicit and, therefore, guilty of illegal activities.

How do you spot a non-compliant umbrella company?

Ignorance as to whether umbrella companies are operating within the supply chain or not is quite common.

The first stage, therefore, is always to check. Gain a clear idea of what companies operate within your supply chain and then plan your due diligence.

Non-compliance and tax evasion can take many forms and are often disguised in a way as to make them difficult to identify. Typical schemes currently include mini-umbrella companies where multiple small companies are incorporated to exploit small business allowances.

Some umbrella companies offer employee loan schemes where remuneration is disguised as a loan and paid to the worker tax-free. Any umbrella companies that process payments via off-shore intermediaries are possibly trying to avoid the UK tax system, posing a significant risk to all parties involved. These are just a few examples, with many more schemes being identified and reported regularly.

Reducing your risk by reviewing your umbrella company suppliers

So, what should you look out for when conducting due diligence?

At a minimum, you should confirm which companies operate within your supply chain and which pose a risk. Once identified, you should check company histories, Directors’ records, convictions and fines, and any overseas references.

Beyond this, we’d recommend that you do regular random checks on worker payslips and contracts to ensure that employer records are consistent and pay is treated correctly for tax and national insurance.

An increasingly popular option, particularly for end hirers, is to declare a chosen supplier as an Employer of Record (EoR), which indicates that you have done your due diligence on an umbrella company and are confident that their operations are accurate and compliant with UK law.

This option provides control and transparency of the payment option adhering to UK tax and employment status law in a ‘top down’ vs traditional ‘bottom up’ way – the end client mandates the payment option and choice of suppliers for all the proper compliance and commercial reasons.

In summary

Supply chain due diligence is a continuous process, and there are no limits to what should or shouldn’t be done. However, to ensure you minimise risk, we always encourage caution.

If you have concerns about your temporary labour supply chain due diligence and compliance or want to understand how Employer of Record can benefit your business, then Workwell can help. Meet our Workwell Enterprise team on 01923 257257.

To find out more about Workwell Umbrella, our compliant solution, contact our specialists in workforce engagement on 01923 257257.