Referring to ARC’s review of the new online tool, click here to view, the new HMRC tool designed to help workers identify umbrella tax avoidance schemes falls short of its potential and, in particular, has very limited benefit for recruitment businesses.
Theresa Mimnagh commented “The tool lacks gravitas and is likely to have little impact, leaving the impression that this is a half-hearted attempt to combat tax avoidance in the umbrella sector. Whilst the intention behind the tool is clear it does nothing to address the key tax risks which an agency can be exposed to if an umbrella does not treat payments to an individual as employment income. Nor does it provide any means for the agency to test an umbrella’s credentials.
“The introduction of the Off Payroll rules in April 2021 saw a surge in contractors moving to umbrella arrangements, with some agencies working with umbrella arrangements either for the first time or in substantially greater volumes. This surge means that employment businesses are exposed to increased levels of risk that they may not fully understand, yet it is critical that they do.
“Most umbrella companies are compliant; but it is the few that bring down the many, and the problem at the heart of it all is that all umbrella companies claim to be compliant regardless of their methodologies or how close they sail to the wind. So how do you sort out the wheat from the chaff?
“The most significant step a recruitment business can take to manage the risk of umbrella non-compliance is to have the right contract in place. Despite the commendable tendency for some agencies to set up an audit process, short of full blown independent audits, no end of cursory audits will likely identify any hidden non-compliance. This leaves even diligent employment businesses at a higher level of risk than need be.
“Having the right contract in place requires an acknowledgement that tax risk may be accompanied by other risk, such as compliance with the Agency Workers Regulations, employment rights claims and so on. Any umbrella company entering the marketplace should be aware that it is offering a solution that should be risk free yet the only party that knows whether it achieves that end is the umbrella company itself, in particular its directors. It follows that the contract must cover all relevant areas with no loop holes whether in relation to tax, regulatory or employment compliance and with a suitable directors guarantee. Lawspeed contracts, although seen by some umbrella companies as potentially overprotective, contain all the required elements and, given the potential risks, why not? No compliant umbrella or director should have any reasonable grounds to object. Assurance is the name of the game.
“Good contracts can, not only set expectations in these areas but, also support due diligence, with compliance and information requirements clearly set out. Combining the right contract with a thorough independent audit, a service we also provide, has to be the gold standard for the future if real peace of mind is to be achieved. HMRC’s tool adds nothing to this equation.”
About the author
Theresa Mimnagh is Associate Director at the recruitment and employment law specialists Lawspeed. Lawspeed group corporate clients benefit from immediate up to date advice on staff engagement and related regulation; employment status; client, IR35, PAYE and umbrella contract templates; contract review/negotiation; self-employment and CIS contract templates; trade membership and government representation; accreditation services and a state of the art digital contract management platform.