Bogus umbrella companies: Is the government finally waking up?

HMRC compliant outsourced payroll companies have long called for legislation to clamp-down on bogus umbrella payroll companies operated as tax avoidance schemes. Is the government finally waking up? David McCormack, CEO of HIVE360 is optimistic.

Pressure for the reform and regulation of the umbrella payroll industry and its transparency continues across the outsourced payroll and recruitment sectors.

There have been many tax avoidance and unscrupulous models of payroll that have left temporary workers financially penalised and open to illegal activity that threatens them and the businesses they work for.

Outsourced payroll providers operating in the recruitment sector are self-regulating – via The Association of Professional Staffing Companies (APSCo) and the FCSA – but the absence of independant, robust, defined regulation of umbrella companies, including Mini Umbrella Companies (MUC), remains a huge issue.

HMRC compliant PAYE payroll providers, like HIVE360, believe transparency of payroll solutions is long overdue. In recent months, the drive for reform has gained further traction in the wake of evidence of growing numbers of workers being financially hit by ‘skimming’, disguised costs, and hidden agency kickbacks – all traits of bogus outsourced payroll suppliers.

There is no statutory definition of an umbrella company, nor how one should behave. As an unregulated industry, lots of new payroll companies have emerged pretending to be umbrella companies, without fulfilling the proper obligations.

Government position
HMRC regularly publishes a list of companies it is investigating for operating non-compliant and unethical umbrella companies.

In 2021, the government launched a consultation to gather evidence from stakeholders on the role umbrella companies play in the labour market, and how they interact with the tax and employment rights systems. This closed in February 2022, but we still await the government’s findings and plans.

Furthermore, the government’s recent guidelines evidence its refreshed focus on encouraging businesses to examine the supply chain with comprehensive, regular due diligence to ensure they work with only fully compliant and ethical payroll providers.

IR35 and holiday pay
Specifically, a growing number of bogus umbrella companies are abusing workers and contractors, by using underhand methods to increase profits by withholding holiday pay entitlements.

IR35 was created in 2000 to clamp down on ‘disguised employment’; to prevent contractors and others who would typically be viewed as ’employed’ by HMRC from being taxed as if they were ‘self-employed’.

IR35 Off-Payroll rules were introduced in 2017 and 2021, making clients rather than individuals responsible for determining the employment status of a worker.

In reality, IR35 pushed thousands of Limited company contractors into using umbrella payroll providers, so that they would be treated, and paid, as if they were genuine employees of the client.

Payment – or rather non-payment – of holiday pay has been under the spotlight in recent months, with anecdotal evidence suggesting the worst cases of unpaid holiday pay involves umbrella companies and recruitment agencies splitting the retained funds between them.

Usually, holiday pay is paid by umbrella companies using one of two methods:

Accrued holiday pay model:
• The umbrella company accumulates the contractor’s holiday pay then pays it on request.
• This is the default model adopted by many umbrella companies and contractors, and SHOULD be clearly defined in their employment contract.
• The largest criticism of this model is that the contractor is required to CLAIM any outstanding holiday pay by taking holiday from the umbrella company BEFORE the end of the year. If they fail to claim, they lose the unclaimed entitlement.
• This is a stipulation exploited by unethical umbrella companies, which simply do not inform the contractors of their entitlements.

Rolled-up holiday pay model:
• A contractor’s holiday entitlement is accounted for and included in their pay slip each month.
• The idea is the contractor sets aside the amount paid to fund their future time off. However, the payment structures put in place for some contractors enable abuse.
• Umbrella contractors receive the bulk of their income in “commission’ included in their invoice and paid on top of a wage contract rate. Some umbrella companies paying holiday pay on a rolled-up basis are only calculating holiday as a portion of the minimum wage rate, when they should be determining it as a portion of the effective contract rate when commission is considered.
• Holiday pay should always be calculated on the gross taxable pay. The usual percentage for 28 days entitlement is 12.07%. Umbrellas using this pay model are expected to clearly state the holiday sum on each pay slip, so it should be clear to a contractor when they are receiving insufficient holiday pay entitlement.

Withholding holiday pay is in breach of Regulation 12 of the Working Time Regulations 1998, which determines a worker’s entitlement to annual leave.

It is not uncommon for recruitment businesses to unknowingly put their business at risk by using a MUC, so thorough, regular due diligence is essential to establish an outsourced payroll provider is fully compliant.

Look out for these signs a company is a MUC:
• Payroll payments are via randomly named companies – that frequently change – with no transparency of pay deductions. There are few or no employers’ NI paid on workers’ pay, classified by HMRC as tax fraud.
• Workers paid through multiple limited companies with unusual names – the MUC model needs payroll companies to have limited payroll payments that allow the use of employers’ NI allowance and very little else.
• Operate from serviced offices, bulk mailboxes, or offshore locations. The individual business type registered with Companies House doesn’t match the Trading Group name.
• Directors/Shareholders are non-UK nationals, non-resident in the UK, and non-tax resident.
• Operate flat rate VAT accounting – which gains them additional income without the need for accounting records.
• Structured to achieve multiple employment allowance opportunities by using multiple Limited companies.

HIVE360 Plus
HIVE360 has just launched a new generation of protection and support for agency payroll.

The two alternative payrolling solutions HIVE360 PAYE Plus and HIVE360 Umbrella Plus, represent a new era for the recruitment sector, by challenging the traditional umbrella model and delivering more choice in the way recruiters outsource temporary workforce payrolls.

Delivered through HIVE360 Plus, recruiters have all of the benefits of outsourcing payroll and associated employment liabilities, but not at the cost of their compliance and reputation, whilst providing a better deal for workers with additional cost saving opportunities.


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