LITRG news: Finding a good umbrella company

As a quick reminder, umbrella companies are employers – they take on agency workers (and other temporary staff) as their own employees.

Agencies specialise in finding people work assignments, but they often don’t want to do all the HR/payroll administration for those on their books, so they outsource it to umbrellas.

When umbrellas take on agency workers, they should be passed an amount of money from the agency (which has received the money from the end client). They use this amount to:

• pay the worker at the agreed rate,
• pay all the 'on top' employment costs (such as Employer NIC and holiday pay) and
• take a small margin (fee) for their services.

HMRC publications

HMRC have issued lots of publications in the last year or so on umbrella companies including:

• Working through an umbrella company - Find out about how and what you’ll be paid if you are an agency worker or contractor and work through an umbrella company. This has been updated as of 7 November 2022 to help workers better understand how you will be engaged, how your pay is made up and what employment rights and tax obligations you have.
• Spotlight 60 - Warning for agency workers and contractors employed by umbrella companies. Find out about the tax avoidance arrangements used by some umbrella companies.
• Risk checker tool – Find out how to check your risk of being involved in tax avoidance if you're an agency worker or contractor working through an umbrella company.
• Payslip checker page – If you're a contractor or agency worker, find out how to check your payslip to make sure you are not involved in a tax avoidance scheme, operated by some umbrella companies.
• Toolkit if you’re a contractor, agency worker, or work through an umbrella company – Find out how to spot the signs of tax avoidance, report avoidance, or get help leaving or reporting a tax avoidance scheme.
• Naming list - Information about tax avoidance schemes, promoters, enablers and suppliers of these schemes (many of the names are umbrella companies).

Is there a problem with umbrella companies then?

Often no, as this recent Employment Tribunal decision that an umbrella company was not making an unlawful deduction from wages, helps demonstrate. Many umbrella companies act within the law and take the welfare of their workers very seriously.

However, some umbrella companies pay people in non-compliant ways, including by using something called disguised remuneration (DR) to make tax savings/reduce their costs.

Disguised remuneration is where you are paid a minimum wage element and a non-taxable element like a loan, grant, advance etc. DR is not compliant with tax law, as in reality, all money paid to you in return for your services should be subject to PAYE income tax and National Insurance contributions (NICs).

All the HMRC publications linked to above, are focussed on trying to tackle DR by raising awareness of the risks and changing taxpayer behaviour. This is based on an underlying assumption that the key driver of DR ‘usage’ is individual taxpayers actively seeking tax avoidance opportunities to increase in their take home pay.

The key thing to understand about DR, which isn’t really made clear in any of the publications, is that in some instances, DR may benefit the umbrellas but have no (or negligible) impact on a worker’s take home pay. This means you may have no knowledge whatsoever that you are being paid in a non-compliant way.

For example, if an umbrella makes you a non-taxable payment, at the very least, there is no need for them to pay Employers NIC on it. Some non-compliant umbrella companies simply frame things in terms of you receiving a specific amount of take home pay or a percentage – 78%, 80% etc. – meaning that they may make even more out of you being in such a scheme as they can potentially keep the difference.

You therefore need to make sure your umbrella company is not using a DR scheme to pay you! Although HMRC should pursue the umbrella company in the first instance for any unpaid taxes, there may be consequences for you of being paid through DR – even if you didn’t know.

Some possible warning signs for you to be aware of are:

• not receiving a payslip or receiving a payslip that shows a different ‘net’ amount to what you actually received;
• receiving more than one payment into your bank account each pay period; and
• information in your HMRC Personal Tax Account about your pay and taxes that does not match what you are being paid. 

You can read more about how umbrellas benefit from DR, how to avoid getting caught up in it and what the risks are for you, in our article here.

How else can I protect myself from DR?

As well as carefully checking that you are being paid correctly, you might want to try and involve your agency. A good agency should be concerned to make sure that any umbrella companies they work with are meeting their legal obligations – not just because it protects workers but because it can protect them too.

Agencies have access to official government help and information on how to do due diligence to assure their supply chain. There are even commercial tools in the marketplace available to agencies, that can read and audit umbrella company payslips. They then cross-reference the audit with the assignment rate (that is, the amount paid by the agency to the umbrella company) and the pay and tax information that has been sent to HMRC by the umbrella. The combination of these 3 steps means that they can identify when workers are being paid in a non-compliant way, but also other potential pay and tax skimming/abuses (see below) by umbrella companies.

There are of course other ways of agencies checking umbrella companies, but the key point is that agencies have a role to play here in stamping out DR and you should not be afraid to raise any concerns with them.

What other issues are there?

We look at other types of non-compliant umbrella schemes currently in use in our ‘umbrella’ report in 2021. 

The government published a call for evidence in December 2021 asking for up-to-date information about how umbrella companies operate. We responded to the call for evidence setting out some issues that we think they should be aware of in the sector, such as around retention of holiday pay. Our response was an update on developments in the umbrella company marketplace since the publication of the report.

In May 2022, we published an article, ‘Umbrella companies - Five things to watch out for in 2022/23’. The umbrella company marketplace is constantly changing so there may well be other issues and arrangements that we have not covered in these publications.

We should reiterate that not all umbrella companies act non-compliantly, but you should ensure you check any arrangements carefully.

How do I know if my umbrella company is good/compliant?

We outline how a good/compliant umbrella company should work in our factsheet.

Our factsheet has been updated as of October 2022 and takes into account some recent changes and developments, including around holiday pay. 

The key things to look out for (in addition to making sure the agency is paying the umbrella the correct ‘assignment rate’) are that you are given employee rights including holiday pay and that all your pay has PAYE operated on it by the umbrella company. That means the right amount of tax and National Insurance should be deducted.

There are some other basic checks you can do as part of your research before you sign up to work for a particular umbrella company.

You could check the umbrella’s website, find them on social media, look up other websites (sites like Trustpilot feature umbrella company profiles) and look for news and recent events about them. If they are a limited company, you could check they are registered on Companies House and that their records look up to date and don’t look usual in any way. More information is here.

You may ask – is there a public list of ‘good’/compliant umbrella companies who satisfy relevant criteria that I can use to help me choose? The short answer is no as umbrella companies are not currently regulated. However, in the absence of this, there are two main bodies in the industry that set standards that umbrella companies should meet: FCSA and Professional Passport (PP). Where an umbrella holds either accreditation it is a sign that the umbrella provider has met the standards for that body.

However, umbrella companies do not have to join either of these bodies, it is a choice for each umbrella to make. There may be nothing wrong with an umbrella company that is not accredited. On the reverse, it is possible that even if an umbrella is accredited, you could still find problems (which should be reported to the relevant accreditation body).

That is why it is extremely important that you always do your own research into any umbrella company and our refreshed factsheet is a good starting point!