Responsibilities for employment businesses working with umbrella companies

As an employment businesses (sometimes called a recruitment agency) you find workers for other businesses (sometimes called end clients).

You may use umbrella companies to employ those workers. The umbrella company will usually be the worker’s employeremployer. andThey isare responsible for:

• paying the worker’s wages
• operating PAYE as part of their payroll

WhileMany many umbrella companies operatefollow legallythe andtax compliantly,rules, but some do not. They may not pay all the money owed to theworkers, worker or to HMRC.

Working within the law

As an employment business, you must comply with employment and tax law when working with umbrella companies,companies. includingThis includes requirements for:

• operating in the recruitment sectorsector, in the Employment Agencies Act 1973 and the Conduct Regulations 2003

• ensuring agency workers are treated nothe lesssame favourablyas than comparable permanent staff in the Agency Workers Regulations 2010

You must:

1. submitSubmit the quarterly employment intermediaries return for workers you place with end clientsclients, where you do not operate PAYEPAYE. includingThis should include umbrella company employeesemployees.

2. operateOperate PAYEPAYE, where the workers you supply to a UK end client are employed by an overseas employeremployer, such as an umbrella companycompany, with no UK presence,presence. underThis thewill rulesnot forapply offshoreif intermediaries unless someone else operates PAYE on your behalfbehalf. Read the rules for offshore intermediaries for more information.

3. followFollow the VAT requirements for operating self-billing with an umbrella companycompany.

4. payPay tax and any National Insurance contributions on any cash incentives or rewards your employees receive directly from an umbrella companycompany.

5. includeInclude incentives or rewards your business might receive from an umbrella company,company like(like payment for inclusion on a preferred supplier list,list) as part of taxable income or profitsprofits. Read under the rules for income tax and rules for Corporation Tax, for more information.

6. preventPrevent illegal working,working. includingThis includes checking that umbrella companies are carrying out and recording right to work checks on temporary workers,workers. asRead set out in the Immigration, Asylum and Nationality Act 2006 for more information.

7. notNot agree to or accept gifts including(including moneymoney), which which:

• encourage any part of the supply chain to perform their functions or activities improperly or
• rewards them for having already done so,so

Read as set out in the Bribery Act 2010 for more information.

Supporting workers

Workers can find being employed by an umbrella company confusingconfusing. andWorking working for a non-compliant umbrella company can cause them further problems. Supporting workers can mean you’llthat you will:

• receive fewer queries, queries
• improve compliance in your supply chain and
• help protect your business’s reputation.
  reputation

Explain how the worker will be employed

ExplainYou should explain to the worker:

• how the umbrella company employment arrangement will work to the worker, as well as
• any other options for arranging employment that might be available to them,them

They so that they can then decide if it’sworking through an umbrella company is right for them.

You should share information on working through an umbrella company with workers. This will help workers understand employment rights and tax responsibilities.

Be clear about pay rates

Be clear about pay ratesrates, both when you you:

• advertise a job and when you
• discuss roles with prospective workers.
  workers

You should be clear that:

• the assignment rate (sometimes known as the contract or uplifted rate) is the rate that you will pay the umbrella companycompany, not the worker
• the worker’s gross pay will be less than the assignment rate

An assignment rate is sometimes known as:

• an uplifted rate
• an umbrella rate
• a day rate
• an hourly rate

You or your workers can use our tool to work out pay from an umbrella company.

Issue Keykey information documents (KIDs)

You must provide workers with a Keykey information document (KID) under the Conduct Regulations 2003.

KIDsYou needmust toissue tokey beinformation issueddocuments when workers first register with you, before you provide any work-finding services. TheyYou must beupdate updated and reissuedreissue them when there are significant changes.

Some umbrella companies willcreate havekey createdinformation KIDsdocuments for employment businesses to use. However, it is always your responsibility to issue KIDskey andinformation thisdocuments. You cannot bedefer deferredthis to a third partyparty, like an umbrella company.

Before you issue a Keykey information documentdocument, is issued make sure:

• it contains the name of the umbrella company
• it is clear, accurateaccurate, and covers only the required information
• you’ve obtained any information you need to complete the KIDkey hasinformation beendocument obtained from the umbrella company in writing
• that you have a process for getting updated information from the umbrella company when things change

For support completing a KIDkey information document, contact the Employment Agency Standards Inspectorate (EAS).

WhatWorking happens if you work with umbrella companies that do not follow employmentthe and tax law

There can be serious consequences for your business if youyou’re are involved in non-compliant supply chains and do not take reasonable measures to avoid this. A non-compliant supply chain might include umbrella companies who do not follow employment and tax law.

In most circumstances, claiming that you were not aware of non-compliance is not a defence. 

If HMRC investigates and finds you are involved in non-compliant supply chains, we may take action. This includescould include, but is not limited to:

1. prosecutingProsecuting you for failure to prevent criminal facilitation of tax evasion in the supply chainchain.

2. denyingDenying your right to recover VAT input tax and issuing penalties if you knew or(or should have knownknown) you were connected to VAT fraudfraud.

3. issuingIssuing an enablers penalty if you you:

• use an umbrella company that is operating tax avoidance or if you
• have been involved in designing, marketing or facilitating another person to avoid tax

publishing4. Publishing details of those involved in tax avoidance schemes including promoters, enablersenablers, and suppliers and detailssuppliers.

5. Publishing details of deliberate tax defaulters.

The Employment Agency Standards Inspectorate can: 

• close businesses and ban directors and others from running an employment business and publish their details where they breach the Employment Agencies Act 1973 or other relevant legislation such as the  the Conduct Regulations 2003, due to misconduct or unsuitability

• publish the names of individualsof individuals who have been banned from running an employment agency or business

The Gangmasters and Labour Abuse Authority (GLAA) issues penalties for criminal offences under the Gangmasters (Licensing) Act 2004, including those who use unlicensed umbrella companies in the sectors covered by the GLAA.

If HMRC, the EAS or GLAA take action against your business, it can damage your business’ reputation and ability to secure and maintain contracts and business relationships with end clients and workers.

Protecting your business

To protect your business you should understand your supply chains and take action if you spot non-compliance.

It is your decision whether to work with an umbrella company and you should not do so if you suspect they are not compliant, even if a worker requests it.  

Due diligence

Only use umbrella companies that you have carried out due diligence on.

You should:

• identify the entities in your labour supply chain
• understand how workers are being engaged and paid
• assess and reduce any risks of non-compliance

The checks you undertake should be regular, reasonable and proportionate for your business.

You should keep a record of the due diligence checks that you have undertaken on an umbrella company.

You should:

• make sure that if workers ask to work through a particular umbrella company, this is not because the umbrella company has promised them increased take home paypay, or additional untaxed payments they— havethese been promised by the umbrella company, which can be signs of tax avoidance

• find out if the umbrella company is outsourcing its employer responsibilities to a third party, and do due diligence on that third party

• check the umbrella company is VAT-registered, charging VAT, and that the details provided by the umbrella company match

• check the umbrella company details you have match those registered with Companies House

• get reconciliation statements (also known as a pay statements) directly from the worker (where they have them)them), to check the assignment rate matches the money you have sent to the umbrella company

• get payslips directly from the workerworker, to check the umbrella company is acting as the employer and operating PAYE

• check payslips and reconciliation statements you have obtained from workers for unexplained deductions (sometimes called skimming), tax avoidance or underpayment of National Minimum Wage

• Understand your worker’s pay and use our tool to work out pay from an umbrella company

• check the name of the umbrella company corresponds with the bank details provided by the umbrella company

• check the umbrella company has the required insuranceinsurance, including employers liability insurance

• check the accreditation status any umbrella company claims to hold with the relevant body

• check whether the umbrella company holds a GLAA licence on the GLAA website if it operates in a sector covered by the GLAA

Umbrella companies can be involved in many forms of tax non-compliance and there are checks you can carry out to identify them.

These checks:

• help you to apply due diligence to assure your labour supply chains
• prevent criminal facilitation of tax evasion
• reduce the risk of using an umbrella company that operates a tax avoidance scheme
• protect your supply chains from mini umbrella company fraud

Signs of mini-umbrellamini umbrella company fraud can include:

• regularly having to reissue KIDskey information documents to workersworkers, because the umbrella company keeps changing
• differences between the employer’s name on the latest KIDkey information document and the latest payslip
• frequent changes to the PAYE reference numbernumber, which may be included on payslips

Your end client may also want evidence that the umbrella company is the employer and operating PAYEPAYE, to ensure compliance with off-payroll working rules. You should share this if asked.

Reduce your risk

Structure your supply chains in a way that is easy to understand. You can do this by keeping your supply chains as short as possible. This makes it easier to carry out due diligencediligence. andIt also lowers the risk of non-compliance further down the chain, particularly by fraudulent umbrella companies. 

Give your staff training to help them identify non-compliance within your supply chains and have clear procedures on how to report it.  it.

If you think that an umbrella company in your supply chain is operating non-compliantlynon-compliantly, report them to their accreditation body if they belong to one.

Report concerns

You can report tax fraud and avoidance by a person or business to HMRC .

You can report concerns about pay and work rights including National Minimum Wage, employment agencies, gang masters, or working hours.