Compliance – How bad can it get?

So, as a recruiter, what should you be looking for in an umbrella company? Obviously the benefit to your business comes top of the list but then you have to think about compliance – everyone goes on about it so it must be important! The trouble is all umbrella companies say that they’re compliant; type ‘umbrella company’ into Google and you’ll see loads of them advertising the fact:

“Retain at least 84.5%. Compliant & Insured. Risk Free‎”

“Up to 90% After Tax.100% Compliant”

What’s wrong with that I hear you ask? Well, the basic rate of tax is 20%? Even working through a Limited Company you are liable for Corporation Tax and that starts at 23%! It doesn’t take a genius, therefore, to work out that something isn’t quite right. There are many schemes being operated under the name of ‘umbrella company’ that make these sort of promises; most of them are based offshore and most involve some sort of Trust and loan arrangement, with the worker registered as a sole trader.

Mind you, there are some that try even harder to convince you that working with them will present no risk to you or your contractors: “Net 81% with No Offshore Loan! London based. HMRC compliant.‎” That’s got to cover it all then hasn’t it? No loan, based in the UK and HMRC compliant? Not really.

Any advertisement which claims ‘HMRC compliance’ should be studiously ignored – HMRC don’t approve anything, just try asking the umbrella company to prove it and you’ll see what I mean. Plus we have the added complication that 81% take home pay, with no expenses is pretty difficult to achieve through PAYE unless the worker is very low paid. Many avoidance schemes make claims about compliance which are designed to impress such as “supported by QC opinion” but what exactly does that mean?? If the opinion on the scheme is not the same as HMRC’s it certainly won’t offer any contractor using the scheme, or any recruiter recommending the scheme, any sort of protection.

So then you have to consider what HMRC do to people who promote schemes that deprive the Treasury of cash. Their latest wheeze is to bring back the old favourite – debt transfer! If a recruiter deals with an offshore scheme that doesn’t then cough up income tax, employee’s and employer’s National Insurance contributions they will be getting a rather large bill from HMRC. If the recruiter then goes down the tubes as a result of the huge bill the debt passes to the end client. I am sure that even the threat of this is making high reward, offshore schemes seem less appealing by the minute. So what about UK based umbrella companies? Well, they will also claim that they are all compliant. So what can recruiters do to make sure they don’t have a dud on their PSL? Ask to see the umbrella company’s over-arching contract of employment and then check out the HMRC website and see what they expect to see in an over-arching contract – if the two match then you can tick that box. If it doesn’t match then the umbrella company is not maintaining continuity of employment and should not be allowing its employees to claim tax relief on travel and subsistence expenses.

Again, this is something that HMRC take umbrage to – the upshot is the umbrella company will be landed with a huge bill for underpaid employer’s NI and the contractor will end up with a huge bill for underpaid income tax and employee’s NI. I would imagine that the contractor will then not look to favourably on the recruiter that recommended the umbrella company and would probably recommend that all his contractor friends avoid said recruiter like the plague. On the subject of expenses – umbrella company employees can claim tax relief on certain expenses but it is HMRC who determine what is allowable and what isn’t, not the umbrella company.

If your contractors are being advised that they can take home more money through one particular umbrella company because they have such a great expenses policy, I would ask exactly what it is being allowed. Be especially wary if the contractor is spending £3 or £4 at lunchtime for a sandwich but is being allowed to claim £25 per day subsistence! Final note – all umbrella companies should all work in the same way – the only differences will be their margin and the levels of service. If an umbrella comes to you offering ‘increased take home pay’ you can bet your bottom dollar that HMRC won’t like it and they certainly won’t like the recruiter that recommends it.

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