New HMRC guidance: are there umbrella companies in your supply chain?

HMRC set out how organisations should exclude non-compliant umbrella companies from their labour supply chains – what do you need to do?

Here’s what you need to know

Employment businesses (or ‘recruitment agencies’) might source contingent labour for their clients by engaging with ‘umbrella’ companies. These employ the workers who are provided to the employment business’s client (the ‘end-client’). As employers, umbrella companies have employment law, payroll withholding, and other tax obligations. Many comply with these obligations but some, often offshore, do not. HMRC recently published their expectations of what organisations should do to exclude non-compliant umbrella companies from the labour market. Though aimed at employment businesses, HMRC’s guidance is also relevant to end-clients, who must satisfy themselves that the employment businesses they engage take appropriate steps to secure the labour supply chain against non-compliance. Organisations whose processes fail to reflect HMRC’s expectations may be exposed to higher financial penalties and reputational damage should non-compliant umbrella companies be found in their supply chains. This article summarises what employment businesses and end-clients need to know and what action they may need to take. 

Why HMRC’s new guidance matters

Umbrella companies provide flexibility in the labour market. But those that don’t comply with their employment law and tax obligations can lead to workers being exploited and compliant competitors being undercut – harming individuals and distorting the market through unfair competition.

Following a call for evidence on the role and impact of umbrella companies, the Government consulted on potential reforms to increase worker protections and protect public revenues (see our previous articles on the overall consultation proposals and specific payroll tax considerations). 

The publication of HMRC’s new guidance, in addition to the prospective regulatory reform, demonstrates how seriously the Government is focusing on excluding non-compliant umbrella companies from the UK labour market.

Employment business and end-clients should therefore ensure they can demonstrate that the systems and processes for securing their labour supply chains meet the standards set by HMRC’s new guidance to avoid potentially significant financial liabilities, penalties, and reputational damage.

What does HMRC’s new guidance cover?

The new guidance highlights employment businesses’ current obligations (e.g. where appropriate submitting quarterly employment intermediaries returns to HMRC) and how to support workers who are employed by umbrella companies (e.g., 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 (e.g., penalties for enabling tax avoidance, and prosecution for the criminal facilitation of tax evasion).

Importantly, the new guidance also sets out specific due diligence steps that HMRC expect employment businesses to undertake. In summary, employment businesses should identify each member of their labour supply chains, understand how workers are engaged and paid, and assess and reduce the risk of non-compliance with employment law and tax obligations. The due diligence work carried out should be reasonable and proportionate to the scale of the employment business’s operations, checks should be regular and appropriate records retained. Staff who are responsible for supply chain due diligence should be trained to ensure they can identify non-compliance and are clear on what action to take if non-compliant umbrella companies are identified.

Specific checks that HMRC expect to see include:

  • Obtaining workers’ payslips to ensure that at least National Minimum Wage is being paid, there are no unexplained salary deductions, and the umbrella company is operating PAYE with no indication of any tax avoidance activity;
  • Ensuring that workers who request to work through a named umbrella company have not been promised increased take home pay or untaxed payments (which could indicate tax avoidance); and
  • Checking whether the umbrella company outsources its employer obligations (and, if so, to undertake due diligence on the relevant outsourced service provider).

What should employment businesses and their clients do?

The new guidance clearly sets out how HMRC expect employment business to exclude non-compliant umbrella companies from their labour supply chains. Employment businesses should therefore measure their current systems and processes against these standards to confirm whether they meet HMRC’s expectations. If not, the deficiencies should be addressed to ensure that the due diligence process is robust and can be demonstrated to reflect HMRC’s new guidance.

End-clients should also satisfy themselves that the employment businesses they engage are taking appropriate action to reflect HMRCs’ new guidance in their systems and processes.

Please contact the authors, Donna Sharp (solicitor), or your usual KPMG in the UK contact to discuss what HMRC’s new guidance means for how you manage your labour supply chain risk.

You can also read our coverage of HMRC’s recently published guidance on good practice in Off-Payroll Working (OPW or IR35) compliance, and Autumn Finance Bill provisions to allow offset of certain taxes paid by workers and their personal service companies where OPW withholding errors have arisen and a settlement is required with HMRC.