The UK government has outlined fresh plans to tackle tax avoidance by some rogue firms posing as umbrella companies. 

Around 500,000 workers, including teachers, care workers, consultants and contractors currently use umbrella companies to carry out temporary and flexible work. 

For Miles Grady, Director at Umbrella.co.uk, the proposed changes represent a warning about due diligence for recruitment agencies and end clients. 

He said:

“Under the new suggestions, recruiters and employers that use umbrella companies could be held liable if something goes wrong. 

This means that these firms need to be very careful when choosing an umbrella partner.”

New umbrella company rules

A new consultation launched by the Treasury outlines three broad options for reform. 

The first measure would create a new requirement for recruiters and clients to conduct due diligence on any umbrella companies they use. This approach would include stiff penalties if the recruiter or company failed to carry out necessary checks. 

The second proposal would mean passing new legislation to allow HMRC to recover unpaid taxes from another business in the labour supply chain. This means that if an umbrella company doesn’t pay all the taxes it is supposed to, then other companies could be left with the bill. 

The third measure would treat recruiters as employers for tax purposes. So, even if an umbrella company is acting as an intermediary, the recruiter would still be responsible for tax and payroll irregularities. 

Miles Grady said:

“Some of these changes will be bigger and more disruptive than others, but they all share a common theme - they involve the shifting of liability from umbrella companies to recruitment agencies or the end client. 

If a company is working with a dodgy umbrella and they vanish into thin air, the taxman could come knocking at the company’s door.”

Umbrella companies act as an intermediary between workers on fixed-term contracts and their end clients or agencies. The umbrella company receives money from the client or agency and pays the worker through PAYE - deducting taxes and fees as necessary.

Unfortunately, some rogue operators promote themselves as umbrella companies when they are, in fact, tax avoidance schemes. 

HMRC has tried to crack down on these activities and has recently taken to ‘naming and shaming’ some of the schemes it says are avoiding taxes. 

Through the new consultation, the government also wants to define umbrella companies and their role more accurately. This could prevent rogue operators from bypassing rules with alternative business models. 

A warning to employers and recruiters

With the government proposing severe penalties for any recruiters and employers that fail to carry out due diligence, it’s essential they put in the extra effort when choosing an umbrella company. 

This involves going beyond surface-level checks, understanding the operational practices of the umbrella company, and ensuring that they are in full compliance with tax and employment regulations.

At Umbrella.co.uk we pride ourselves on being 100% reliable and compliant, which is why we welcome tougher regulation of the market.

Umbrella.co.uk is accredited by trusted bodies like the FCSA and ASPCo and the company has a long track record of meeting all our tax obligations and of treating workers fairly. 

Miles Grady said:

“Workers, recruiters and end clients need protecting from rogue umbrella companies. That’s why we welcome this government consultation on the future of the umbrella industry. We look forward to working with HMRC and other stakeholders to strengthen this vital section of the labour market.” 

For more information, speak to a member of the Umbrella.co.uk team. Call: 0800 121 6513.