Statutory due diligence to tackle non-compliant umbrella companies

The government has announced further details on its plans to tackle non-compliance in the umbrella company market and drive out ‘bad actors’ from labour supply chains. A proposal to introduce statutory due diligence was included in a Policy Paper comprising a package of tax policy measures published by the Revenue on 18 April.

A reminder. The term 'umbrella company' describes an arrangement under which contract workers are supplied by a company to an employment business which then supplies the workers to a business, the end user client, The client is invoiced for the work that those workers undertake. The workers are then paid as employees or self-employed by the umbrella company. The government has said that it remains concerned about the scale of non-compliance surrounding umbrella companies, and the detrimental impact that this has on workers, taxpayers, and the labour market. 

Tax lawyer Penny Simmons has written about this development in her Out-Law article: ‘UK minded to introduce umbrella company statutory due diligence requirement.’ She says that whilst this is just a proposal, if it came about it would add a further significant tax compliance burden on businesses to police their supply chains and ensure that those they engage with are paying the correct amount of tax. She says: ‘The possibility of such a requirement again emphasises the need for businesses to have robust due diligence processes when engaging with temporary workers and labour suppliers and to have effective tax risk management processes in place.’ We’ll come on to due diligence in a moment.

This development follows on from a consultation launched by the government in June last year, seeking strategies to combat tax non-compliance within the market. A proposal to introduce a statutory requirement for end-clients or recruitment agencies to carry out due diligence on umbrella companies was part of that consultation – the government has not yet responded to that consultation. Meanwhile, HMRC has said that it will publish new guidance later this year to support workers and businesses that use umbrella companies. 

As we await the government’s response and further guidance from HMRC, companies are being advised to adhere to HMRC’s previous guidance published on 30 November last year called ‘Responsibilities for employment businesses working with umbrella companies”. Whilst it is aimed primarily at employment businesses it is also relevant to end-clients who need to make sure that the employment businesses they engage with take the necessary steps to secure the labour supply chain against non-compliance.  

So, let’s hear more on all those points. Earlier, employment lawyer Emma Johnston joined me by phone from Glasgow to discuss it. First question, how significant is it?

Emma Johnston: “It’s certainly very significant for the employment businesses. The guidance is purely focused on their responsibilities, the agency's responsibilities, in this scenario. It’s very clear that there are various penalties that can be issued to employment businesses in situations of non-compliance by umbrella companies and, of course, the driver for this is very much the fact that it is recognised that there is a lot of non-compliance in terms of umbrella companies due to the lack of regulation in that area and that was, to a certain extent, what prompted the consultation which took place a number of months ago to which we've not yet had a response. So it is it is very significant and it indicates as well, the way the government is going in terms of trying to tighten up regulation in this area. Now, the guidance itself doesn't specifically address the responsibilities on end clients but that should not be interpreted to mean that end clients can turn a blind eye to whatever is going on in their supply chain. What's really clear from the guidance is that although, as I say, it's focused on employment businesses, the government is very keen to point out that there are significant reputational issues with potential non-compliance further down the supply chain, and the government is now looking at naming and shaming employment businesses who are not keeping on top of this. Naturally, the implication of that is likely to be that the end client is also going to be swept up in all of that. So, it’s really important, and the position has not changed, that end clients need to be absolutely on top of what is going on in their supply chain.”

Joe Glavina: “So, Emma, the message is to check your supply chain carefully but what does that mean in practice?”

Emma Johnston: “So, the main expectation in this area is around due diligence and that can be everything from checking the details on Companies House in relation to the umbrella companies being used in the supply chain. It can be making sure that the umbrella company is VAT registered. Also, often you might find, as an end client, that questions are raised by workers as to what's happening with their pay, for example. Now, the end client isn't involved in payment of the workers, however, if there are queries being raised the end client should be taking those seriously and should be liaising with the employment business to make sure that they get satisfactory answers to those questions. The other thing is, whilst the guidance, as I say, is very focused on the employment business’ responsibilities, an end client would do well to almost mimic that, in that they should also be doing checks. Not just checks, but regular checks because the position might change and, ultimately, what the end user is looking for is satisfaction that the employment and tax rules are being complied with by umbrella companies.”

Joe Glavina: “You mentioned reputational risk, Emma, talk to me about that.”

Emma Johnston: “Yes, I mean at the end of the day the reputational risk is really one of the biggest concerns for our clients. The issue our clients have, of course, is that they are the household names. So, even if they are not accused of any wrongdoing, it is highly likely that in our report talking about non-compliance by an umbrella company that the end client’s name is going to crop up and that is the one that's memorable. So, it's quite feasible that in naming and shaming non-compliance further down the chain, that the end user’s name is going to be the one that hits the headlines. So, that's a really uncomfortable position for our clients and we obviously want to avoid that. The other issue is, of course, that at the end of the day there are many situations where our clients will be applying for tenders and pitching for work and other contracts, and often there will be a question in there about any sort of findings of non-compliance and other things like that. So, if you have something that's in the press, or has been recently, about your chain not being compliant then that can be really unhelpful in terms of winning work, etcetera. So, there are there are various knock-on impacts from that which could be quite nasty in practice.”

Joe Glavina: “Finally Emma, anything else for viewers to take onboard?” 

Emma Johnston: “I think it's just a reminder. I don't think there is any change as such, but there is certainly a reminder to HR, in the end client situation, to just have a look at the supply chain and make sure that they are absolutely comfortable that they understand how it works and not to be afraid to approach the employment businesses. As I say, not as a once off but on a regular basis, to ask questions to make sure that they have a complete record and understanding of what's going on further down the chain. As long as you can show that you've kept that record, then that can be really helpful if ever there are any questions asked by HMRC, or other parts of the government.”

Emma mentioned the importance of conducting due diligence and keeping an accurate record of the steps you’ve taken to check compliance within the supply chain. Helpfully, towards the end of the guidance the Revenue sets out 11 steps you can take to help ensure compliance and we suggest that is a good check list to work from. As for this latest development - the statutory due diligence proposal - tax lawyer Penny Simmons has written about in some detail in her Out-Law article: ‘UK minded to introduce umbrella company statutory due diligence requirement.’ We’ve put links to that article and the guidance in the transcript of this programme for you.

LINKS
- Link to Policy Paper: ‘A summary of measures to support the ambition for a tax system that is fair and supports growth’
- Link to Out-Law article: ‘UK minded to introduce umbrella company statutory due diligence requirement’
- Link to Government Guidance: ‘Responsibilities for employment businesses working with umbrella companies’