As an independent recruiter, using an umbrella company to pay contractors is a great way of reducing costs and easing your admin burden, particularly if you are new to contractor recruitment or that side of your business is growing fast. A word of warning however – be careful which providers you engage with.
A few cautionary tales
In his blog post just a few weeks ago, Martin Fryer from Brookson referred to an aggressive tax avoidance scheme which used mini companies in the Philippines to pay workers. It seems that the scheme suddenly went into liquidation as soon as the tax man came calling, minimising the chances of any successful recovery action by HMRC.
This is just latest case to blight the umbrella industry – recently three umbrella company directors were jailed for a huge VAT payroll fraud. Read full story here
Contractor loan schemes is another ongoing problem. Promoters dress these schemes up as legitimate umbrella companies, and aggressively push them to contractors with unrealistic promises of massively inflated take home pay. Read more about this
Know your risk…
Being associated with fraudulent practices exposes you to potential financial liability and the sort of reputational damage that can ruin your good name and cost you valuable relationships with clients and candidates.
In the cases we have highlighted above, the recruiters and end clients involved were most likely acting with the best of intentions – putting trust in their suppliers to pay their workers compliantly. It is therefore essential that you know who you are dealing with throughout your supply chain.
Ask yourself these three questions about every umbrella company you are engaging with:
- Do you know that the company you are paying money to is the same company which is paying your workers?
- Have you got confirmation that they are not contracting with any entity outside of the UK?
- Have you got evidence that the supplier is paying the correct VAT, PAYE tax and NI to HMRC?
…then minimise that risk
If the answer to any of the above questions is no, then you should consider your relationship with that supplier.
It can take up valuable resources to carry out robust due diligence on existing and potential suppliers, especially for independent recruiters. However, you can save time and effort by only using fully accredited members of the Freelancer and Contractor Services Association (FCSA).
This is the approach recommended by the Recruitment & Employment Confederation (REC). Out of an estimated 280 umbrella companies operating in the UK, only 8 are fully accredited FCSA members which means they are annually audited against the federation’s strict compliance code, with full disclosure to HMRC. Click here to view the list of FCSA accredited member companies.
By Lynne Gowers