HMRC issues new umbrella guidance for employment businesses

The Revenue has published guidance on the responsibilities of employment businesses when working with umbrella companies in their supply chains. It is aimed at employment businesses but, importantly, it is also relevant to end-clients who need to make sure that the employment businesses they engage with take the necessary steps to secure the labour supply chain against non-compliance. 

The background to this is the government’s call for evidence on the role and impact of umbrella companies – the government gave its response to that back in June last year. The publication of this latest guidance shows how seriously the Government is focusing on excluding non-compliant umbrella companies from the UK labour market. The message from the Revenue is loud and clear – that employment business and end-clients must ensure they can demonstrate that the systems and processes for securing their labour supply chains are fully compliant and, importantly, that they are able to produce the evidence to demonstrate that compliance if the Revenue comes calling. 

In summary, the guidance highlights employment businesses’ current obligations, for example in submitting quarterly employment intermediaries returns to HMRC, and how to support workers who are employed by umbrella companies. So, for example, explaining how their employment arrangement works, how much they will be paid, and issuing and keeping a current Key Information Document. It also highlights risks to employment businesses of working with non-compliant umbrella companies in terms of the potential financial penalties for enabling tax avoidance, and prosecution for the crime of facilitation of tax evasion. And, on top of that, particularly for end users, the risk of reputational damage if and when the breaches hit the press.

So, let’s get a view on the new guidance and how it affects both employment businesses and end users. Earlier, Emma Johnston joined me by phone from Glasgow to discuss it. First question, how significant is it?

Emma Johnston: “It’s certainly very significant for the employment businesses. The guidance is purely focused on their responsibilities, the agency's responsibilities, in this scenario. It’s very clear that there are various penalties that can be issued to employment businesses in situations of non-compliance by umbrella companies and, of course, the driver for this is very much the fact that it is recognised that there is a lot of non-compliance in terms of umbrella companies due to the lack of regulation in that area and that was, to a certain extent, what prompted the consultation which took place a number of months ago to which we've not yet had a response. So it is it is very significant and it indicates as well, the way the government is going in terms of trying to tighten up regulation in this area. Now, the guidance itself doesn't specifically address the responsibilities on end clients but that should not be interpreted to mean that end clients can turn a blind eye to whatever is going on in their supply chain. What's really clear from the guidance is that although, as I say, it's focused on employment businesses, the government is very keen to point out that there are significant reputational issues with potential non-compliance further down the supply chain, and the government is now looking at naming and shaming employment businesses who are not keeping on top of this. Naturally, the implication of that is likely to be that the end client is also going to be swept up in all of that. So, it’s really important, and the position has not changed, that end clients need to be absolutely on top of what is going on in their supply chain.”

Joe Glavina: “So, Emma, the message is to check your supply chain carefully but what does that mean in practice?”

Emma Johnston: “So, the main expectation in this area is around due diligence and that can be everything from checking the details on Companies House in relation to the umbrella companies being used in the supply chain. It can be making sure that the umbrella company is VAT registered. Also, often you might find, as an end client, that questions are raised by workers as to what's happening with their pay, for example. Now, the end client isn't involved in payment of the workers, however, if there are queries being raised the end client should be taking those seriously and should be liaising with the employment business to make sure that they get satisfactory answers to those questions. The other thing is, whilst the guidance, as I say, is very focused on the employment business’ responsibilities, an end client would do well to almost mimic that, in that they should also be doing checks. Not just checks, but regular checks because the position might change and, ultimately, what the end user is looking for is satisfaction that the employment and tax rules are being complied with by umbrella companies.”

Joe Glavina: “You mentioned reputational risk, Emma, talk to me about that.”

Emma Johnston: “Yes, I mean at the end of the day the reputational risk is really one of the biggest concerns for our clients. The issue our clients have, of course, is that they are the household names. So, even if they are not accused of any wrongdoing, it is highly likely that in our report talking about non-compliance by an umbrella company that the end client’s name is going to crop up and that is the one that's memorable. So, it's quite feasible that in naming and shaming non-compliance further down the chain, that the end user’s name is going to be the one that hits the headlines. So, that's a really uncomfortable position for our clients and we obviously want to avoid that. The other issue is, of course, that at the end of the day there are many situations where our clients will be applying for tenders and pitching for work and other contracts, and often there will be a question in there about any sort of findings of non-compliance and other things like that. So, if you have something that's in the press, or has been recently, about your chain not being compliant then that can be really unhelpful in terms of winning work, etcetera. So, there are there are various knock-on impacts from that which could be quite nasty in practice.”

Joe Glavina: “Finally Emma, anything else for viewers to take onboard?” 

Emma Johnston: “I think it's just a reminder. I don't think there is any change as such, but there is certainly a reminder to HR, in the end client situation, to just have a look at the supply chain and make sure that they are absolutely comfortable that they understand how it works and not to be afraid to approach the employment businesses. As I say, not as a once off but on a regular basis, to ask questions to make sure that they have a complete record and understanding of what's going on further down the chain. As long as you can show that you've kept that record, then that can be really helpful if ever there are any questions asked by HMRC, or other parts of the government.”

Emma mentioned the importance of conducting due diligence and keeping an accurate record of the steps you’ve taken to check compliance within the supply chain. Helpfully, towards the end of the guidance the Revenue sets out 11 steps you can take to help ensure compliance and we suggest that is a good check list to work from. We’ve put a link to the guidance in the transcript of this programme for you. 

LINKS
- Link to HMRC guidance: ‘Responsibilities for employment businesses working with umbrella companies’
- Link to Call for Evidence: umbrella company market