Finding and then choosing a HMRC compliant Umbrella and Subcontractor Company is somewhat of a minefield, so here’s a suggested top ten essential points to check the validity of a potential supplier.

Issues of false self-employment and debt transfer can particularly affect agencies financially and possibly damage reputations in terms of market status and credibility; however agencies don’t always have direct control over how things are really handled.

Although it is a complicated issue, the following top tips will hopefully provide a useful guide to agency directors as to the bare minimum level of HMRC compliance their agency should receive from its supplier, and in return, limit the potential risk of exposure to such detrimental factors as debt transfer and false self-employment.

1. Is your current supplier an Umbrella Company or Payroll Provider?

Zeva was recently asked by an agency to look at a competitor whom the agency reluctantly used for workers paid less than Zeva’s minimum pay rate. They wanted to know why someone else could do it, and we couldn’t.  What we found shocked the agency.

First of all the umbrella company involved insisted that the agency continued to provide contracts to the workers, and the umbrella company had no contract with the workers. This means the Umbrella is providing purely a payroll service, and for this service charged up to £20 a contractor, when a payroll service is typically about £1.50 per payslip. This would only be a case of overcharging if everything else was above board.

The workers were not contacted by the umbrella company, and did not know they were in an ‘umbrella scheme’. Because the umbrella company had dispensations, it claimed them automatically for each worker, with no connection to whether ANY expenses were incurred. In fact expenses were applied only in proportion to the total pay of the worker, so that Employers and employees National insurance were  minimised.

The average underpayment of tax and National insurance was around £30 per contactor. The agency put 400 contractors through this umbrella company, so a total underpayment of about £12,000 a week, or £600,000 per year.  When this is discovered by the taxman they will request repayment, plus interest, plus taxes from the Umbrella Company. The company will fold, and the directors will keep their fees.

All ambiguity about the real employer is now removed, HMRC will move to the next company. This exactly the sort of debt that transfer of debt regulations were designed for. Not only is the agency at risk, but now the directors personally too.

2. Check that your supplier operates a comprehensive qualification process

The provider should identify the status of each individual correctly right from the start and pay them in the correct manner according to their employment position.

It is conceivable that the majority of suppliers simply do not have the capability or rigorous checking processes in place to ensure that the individual worker is correctly categorised into the right payment field. It is not enough to simply ask the worker ‘which product do you want?’ as this will often beg the question from them: “which provides me with the most income?”

Establishing the individual worker’s employment status should be addressed from the very start of a classification process, and needs to be continually checked throughout the worker’s contracted employment. If the individual is classified incorrectly, this will lead to a debt of unpaid taxes being accrued throughout their time of employment – debt which can then be passed on to the supplier or agency.

Ask to see sample contracts and ask for proof that they are rigorously implemented.

3. Fixed-term contracts V’s open-ended contracts

All temporary workers should work on a fixed-term basis and not an open-ended contract.  Whether it is a self-employed worker or an umbrella employee, each individual should be placed on a temporary work contract with a fixed term, as this ensures that the qualifying process is not jeopardised and that all details which were given at the start of the contract remain unchanged throughout the term.

Once the contract enters a period in which work is to be extended, all details should be checked again and a new contract started, this will ensure the highest level of HMRC compliance.

4. Employment status review

Due to the rising issue of debt transfer, it is not good enough to only review an individual’s employment status at the start of a contract, (as carried out by the majority of Umbrella and Subcontracting Companies). It is essential that regular reviews of employment status are carried out and this can be included when renewing the fixed-term contract as described previously.

Together, the fixed-term contract along with regular employment status reviews will minimise the chance of a debt being seeded and then transferred.

5. Contract for service details

The majority of suppliers work under a contract for services agreement when providing agencies with workers, and not a contract for labour. It is essential that this contract continually details each individual project by each individual location and by each individual start and end date.

If fixed-term contracts are provided to the supplier, their Umbrella Company employees or self-employed subcontractors at the beginning of each term, then this should be easily achieved.

6. Rebates

Agencies should not be swayed with the offer of attractive incentives offered by suppliers. This method of gaining business/new contracts is archaic and now seen as nothing more than a questionable sweetener or backhander, possibly resulting in higher charges being passed on to the contractor who is already being hit the hardest.

7. Use a UK only provider

Overseas providers benefit from protecting themselves within a payment chain and nobody else. If you, your end client and the supplying workforce are working within UK shores, the overseas provider should adhere completely to HMRC rules and regulations, without any exceptions.

8. Misuse and misunderstanding of dispensations

The majority of workers have been exposed to ‘too good to be true offers’ regarding expense claims for Umbrella employees.  Dispensations are in place so a company that handles large amounts of expenses can streamline their administration.

The HMRC are very clear on this, expenses should be incurred wholly and exclusively and necessarily in the performance of your duties provided.   If your current provider uses dispensations as an excuse to process un-receipted expenses, then the seed of debt transfer has already been planted.

9. Employer responsibilities (holiday pay/minimum wage/health & safety etc)

Umbrella Companies, although employing workers on short-term contracts are nevertheless fully responsible for their Umbrella employees as their own employees.  The same level of employment law applies and this ensures that the agency is safe guarded against any compliance dispute.

10. Don’t automatically trust your supplier when they say they are HMRC compliant

Agencies need to ensure that their suppliers have all the necessary documentation to prove the level of HMRC compliance they say they adhere to. With transfer of debt legislation there is a real risk. For your own agency’s protection, you should ask for copies of paperwork and ask for proof of updated contracts. If they are compliant, then this shouldn’t be a problem.

Finally, if agencies don’t start taking an active role and responsibility when selecting the  Umbrella and Subcontracting Company they’re going to work with, instead leaving it to the workers to decide for themselves – then don’t be surprised when the HMRC do!

Protect your agency – ask the questions!