How Payroll/Umbrella Non-Compliance will impact your company’s valuation


If you follow news around Umbrella Companies, you know that the past 6 months have been hit by more revelations and scandals than ever before.

Unlimited fines, Liability for agencies and hirers, detrimental impact to agency’s valuation… Rhys Thomas, Managing Director at WTT Group and Sebastien Sauca, CEO at SafeRec, provide insights that all Senior Managers and Business Owners must know about the impact of payroll non-compliance.


Question (Q): Could you please introduce WTT and SafeRec in a few words


Rhys Thomas (RT): WTT is a multi-disciplinary, professional advisory organisation, specialising in the contracting industry. We provide regulated tax and legal advice to our clients who range from professional contractors to listed corporates operating at all levels of the contracting supply chain. Our forensic tax investigations specialists help companies understand legacy risk from non-compliance and the steps required to limit exposure. Our Legal advisers then work in conjunction with the tax team and the company’s stakeholders to implement simple frameworks for future compliance. 


Sebastien Sauca (SS): SafeRec is a Technology and Consultancy Company, Partner with the REC and APSCo, that offers automated solutions to agencies to deal efficiently with their Umbrella Compliance.

Whether our client is an Agency, a Managed Vendor or an End-Client/hirer, our fully automated AI-Driven Software ensures Payroll Compliance for the entire supply chain. From Umbrella to Agency PAYE, all workers’ pay is audited each week.


Q:  What is your view on Umbrella Compliance?


RT: The phrase ‘umbrella’ remains damagingly associated with a wide range of practices of varying non-compliance. Often arising as a result of commercial market forces that encourage poor compliance, which includes rebates demanded in various guises by agencies, many umbrellas feel compelled to maximise margins to ensure profitability.  

This is made possible by either increasing the margin charged to each contractor, making them uncompetitive in the process or taking a lax approach to compliance to negate this competitive disadvantage. Neither is sustainable over the long term.

As an industry, we regularly see examples of this with the incorrect retention of holiday pay being the most present example following a series of cases on the issue. Perhaps lesser-known examples include deductions for products not required or requested by the contractor, such as insurance, through to the operation of disguised remuneration schemes.


SS: I concur with Rhys. The thousands of payslip audits we process each month clearly show a vast variety of types of non-compliance. If there is one thing that we learned from the data we analysed, it’s that Payroll Non-Compliance is dynamic – a worker can be paid correctly for 4 weeks and get their pay miscalculated for the next 4 following weeks to benefit the Umbrella Company. 

Organisations need to understand that having a strong Umbrella Compliance strategy is now a necessity, a “must have”. The legislation that came into place over the past 6 years such as the Criminal Finances Act shifted the liability to the agency and the supply chain. Too many agencies underestimate the damage that non-compliant payroll providers can have on their business’ future, reputation and valuation.


Q: Is there any type of non-compliance the industry is still unaware of?


SS: There is no doubt about that, and I think it is the reason why so many agencies still don’t have a clear strategy to monitor and audit Payroll Providers. The number of practices & techniques we witness daily is complex and designed to be imperceptible. 

Most agencies we talked to still think that a simple cross-reference between a payslip and an RTI report is enough to check if a payroll provider is compliant. Nothing could be further from the truth. The very large range of non-compliance practices will easily pass this type of check. 


RT: To expand on the topic of Mini Umbrella fraud, it is surprisingly still very unknown at an agency level and is causing considerable problems for supply chains.  This involves many small companies being set up, that are, in reality, controlled by one party, to exploit and abuse two government incentives aimed at small businesses. In addition to non-payment of taxes, this type of fraud is on the increase and may leave agencies out of pocket if HMRC seeks to deny the VAT reclaimed in relation to the supply of workers.

Ultimately, agencies that have failed to prevent the facilitation of UK or foreign tax evasion may face unlimited fines and even imprisonment under the Criminal Finances Act 2017.  At the very least the reputational damage may be enough to destroy the trading relationships throughout the chain.


Q: Does lawful but unethical practices today can have an impact on agencies’ liability tomorrow?


SS: There are numerous debates on Linkedin around: if it is unethical but lawful, is it wrong? My stance on it is simple: in an unregulated world where “there is no statutory definition of an ‘umbrella company’” (HMRC’s own words) every issue specific to the Umbrella Industry is going to be a grey area and therefore probably lawful, for now.

One of the most recent examples is the retention of worker’s holiday pay from Umbrella Companies:

  • Is it lawful? It is at the moment
  • Is it ethical? I think that everyone would agree that having an organisation that financially increases its revenues between 500% and 2000+%, resulting from contractors not taking holiday pay doesn’t really follow the spirit of the law. At least it is highly counterproductive with what the Working Time Regulation intended.

Two things are sure: 1. Laws are more likely to change than ethics –  2. HMRC proved in the past that when they change/make the law it can be retroactive.

Do I believe that the unethical practice of some Umbrella Companies splitting with Agencies the revenue generated from retained holiday pay is going to be punished in the future? Yes, I do, and this is just one example.


RT: Organisations need to understand that with the many powers now at the disposal of HMRC, including the transfer of debt and the agency tax provisions, there is a very real risk of financial loss for agencies from bad actors in the supply chain. 

This is why it is important to understand how each party in the supply chain is working and that adequate compliance measures are in place.  Unless firms can show that they had reasonable procedures in place to prevent the facilitation of tax evasion in their supply chain, they run the risk of being found guilty of a criminal offence.


Q: Is there an impact of Payroll Compliance on Agencies’ valuation?


RT: Absolutely. Agencies and end-hirers looking to have an exit event or merger in the future need to understand the impact of Payroll Compliance on their business valuation. 

Examples include significant penalties arising from Promotion of Tax Avoidance Schemes (POTAS) legislation which can affect a company acquired up to six years after the event giving rise to the penalty. Consequently, the sale price can be impacted substantially following the due diligence stage simply due to potential risks that arise from staff taking rebates from tax avoidance schemes. 


SS: I couldn’t agree more and as Rhys explained POTAS is just an example. I don’t think that anyone will deny that payroll compliance is going to become a much bigger topic in the coming months/years. With an estimated tax gap of £12.7 Billion in 2020-2021 (for Income tax and NIC only), HMRC’s intentions are clear and they equipped themselves with broad pieces of legislation to be able to act.

Many founders we work with start their agencies to have an exit strategy in the future. There is no doubt that today, payroll compliance needs to be part of this exit strategy. And with payroll providers that can substantially increase your liability each week combined with HMRC and the power they have to create retro-active legislation: Sooner is undoubtedly better than later.

The great news is that on the flip side, where compliance may be demonstrated then that may indeed add value to any sale and increase the book value.


Q: How can agencies and end-hirers protect and future-proof their business?


RT: Ideally we would have an offering that combines legal advice and technology. This ideal solution might be available to all parties in the supply chain by mid-September…

SS: … and it might be fully automated and allow organisations to audit live their supply chain. I think the best way to know would be to either follow Rhys or Myself to stay in the loop:

Source SafeRec

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