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  • Crawford Temple

How to ensure that providers are compliant

Updated: Jan 6, 2022

Choosing the right provider is essential. Here, we look at why compliance is vitally important to both contractors and businesses, and how you can ensure that the providers you engage with are compliant.

Choosing a compliant provider

With over 500 umbrella companies operating in the UK at the moment, contractors look to ensure that they choose the right one for them, however there are key factors to be aware of when making this choice, and ensuring a compliant provider is selected.

For example, some umbrella companies may claim that they are ‘HMRC-approved’. This is a false claim, as the HMRC does not ‘approve’ providers. Rather it seeks to emphasise that all providers should work compliantly within its tax regulations. Therefore, umbrella providers making these claims may not be operating in compliance with the law and further guidance.

For freelance workers and contractors, a compliant provider ensures that they are able to work securely. This way, they are able to build up their experience and reputation, as well as having access to all statutory employment rights and benefits such as sick leave and pay, holiday and maternity/paternity leave and pay, as well as a pension. Other benefits include a documented employment history and proof of earnings, which is essential when applying for a loan or a mortgage.

Compliant providers will offer:

  • The independence to work as a contractor

  • The security, rights and benefits of full time employment

  • Administration support, particularly relating to Tax and National Insurance

  • The assurance that the correct amount of tax and NIC will be paid, and that deductions are correct

  • Transparency and accountability

The pitfalls of non-compliance

Some providers claim to offer immunity from HMRC investigation. This is also untrue. No company can offer such an arrangement as contractors are responsible for their own tax liabilities, and claiming that they were badly advised is no excuse under the law.

Some providers also operate disguised remuneration schemes in which some parts of the contractor’s salary are classed as non-taxable and, therefore, not subject to PAYE. Non-compliant providers refer to these amounts as grants, capital payments, annuities, loans, profit shares or credit facilities and promote this behaviour by offering a higher take-home pay than compliant providers.

This is tax avoidance. If contractors become involved with such a provider, even unknowingly, they become part of the problem and will be subject to the enforcement of HMRC.

Ensuring a provider is compliant

It’s not just contractors who must be alert to non-compliant providers. Businesses, including recruitment agencies, run a variety of risks if they engage with suspect schemes.

There are a plethora of red flags to look for when businesses are considering partnering with a provider. These include:

Suspiciously high take home pay – if the amount of take home pay exceeds 80% of a contractor’s gross pay the provider may well be operating a disguised remuneration scheme

Overseas company registration – this might indicate that a provider operates different tax arrangements to companies registered in the UK and therefore may not adhere to tax evasion standards

Newly founded businesses – in order to create the perception of organic and rapid company growth, relatively new companies may operate in a non-compliant way to boost their reputation. Such companies may also have directors with a dubious history of ‘phoenix’ companies – a simple check with Companies House will alert businesses to any questionable behaviour

Payslips – a contractor’s payslips should show all the information relating to tax and NIC deductions, as well as holiday pay and other essential information. If a contractor is not given a payslip this is another serious warning that all is not right

Trends – businesses should be aware of trends such as the sudden and inexplicable popularity of one particular provider, and make appropriate checks

Possible consequences

If businesses ignore the warning signs and engage with a provider who is non-compliant there are serious possible consequences for both them and any company directors. These include, but are not limited to: investigations into the tax status of a business, tax liabilities and penalties for enabling tax avoidance, as well as serious reputational damage both personally and professionally.

It is, therefore, in business’s own best interest to make sure that they perform due diligence on every part of the supply chain, ensure that contracts with providers are water-tight, exercise extreme caution on partnering with ‘too-good-to-be-true’ providers, and provide training to staff to enable them to operate within the law at all times.

If you have questions around working with a compliant provider, get in touch with Professional Passport.

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