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New Guidance Shines a Spotlight on Umbrella Company Practices

The Government has recently issued new guidance which is intended to help recruitment agencies understand more clearly their obligations to contractors who work through umbrella companies. The guidance shines a spotlight on recruitment agents’ responsibilities and is also designed to give more information to contractors to enable them to understand how the umbrella industry works.


Oversight

Umbrella companies act as the official employer for contractors who are hired through a recruitment agency for temporary work, and handle all the administration involved for the agency, such as payroll, Income Tax, National Insurance, as well as dealing with compliance, allowing the agency to offload its employer liabilities.

However, as the new guidance makes clear, recruitment agencies are not able to completely discharge their oversight duties if they rely on umbrella employment arrangements. It states explicitly that agencies still have responsibility for such things as pay rate transparency, disclosure of information and continual payslip monitoring.


Pay rate transparency

One of the most important issues the guidance deals with is pay rates. It states that it’s the agency’s responsibility to accurately calculate pay rates which reflect the actual costs and margins involved with contractors. This is in response to the practice of some agencies who fail to inform contractors of the gross pay rate, rather than the assignment rate, which can leave them confused about the amount of money they’ll take home. 

In future, agencies must clearly inform contractors about their gross pay, their employment expenses, their umbrella fees and their net wage, via a Key Information Document (KID). In this instance, the total gross rate remitted to the umbrella company is called the assignment rate and it must be discussed in full with the contractor in any conversations they have with the agency about their pay. 


The right to reject

Another vital message included in the guidance is that a contractor cannot be forced to join a specific umbrella company – this is now classified as an illegal employment practice. Even if an agency only offers umbrella-based contracts, the contractor still has the right to opt for employment through other channels. 

We welcome this move, however delayed it is, to avoid contractors being pushed into questionable umbrella arrangements without their knowledge or consent.


Strict information disclosure

On a similar theme, we also welcome the demands within the guidance for agencies to provide accurate paperwork from the start of any contractor’s engagement. KIDs are now mandatory and must include specific details about proposed wages, discounts, fees, taxes and net pay, rather than broad templated information. 

KIDs have been a legal requirement since April 2020 and were intended to provide greater transparency on the working terms between contractor and end-client. Whether a contractor is paid directly, via agency PAYE, through an umbrella company or their own limited company, a KID should provide key information such as pay rates, deductions and more. It’s the recruiter’s responsibility to provide complete and accurate KIDS to the contractor at specific points in the contracting process and, from the point of registration, the contractor should receive a sample KID which uses a generic rate to illustrate the ways in which a contractor could be engaged and paid if they take an assignment through the agency.


Once an assignment has been agreed a KID should be updated to include the following information:

  • The contract rate – specific to the particular assignment

  • Statutory deductions – such as Income Tax that will be taken out of pay

  • Non-statutory deductions and fees – such as the umbrella company’s margin. The KID can either list the precise amounts that will be deducted or explain the formula used to calculate them

  • Holiday pay – how holiday pay is determined and calculated

  • Representative example – the KID should include a realistic example statement, using numbers, to demonstrate how deductions will impact take-home pay as well as a proposed gross pay rate

  • Updates – whenever a ‘material change’ occurs, such as a Pension Auto Enrolment, an updated KID must be issued to a contractor within five working days to detail any new deductions. Changes of rate do not require a new KID. 


Contractors are entitled to a KID when they begin a new role, and should insist that the agency provides them with one.


Payslips

The guidance also urges agencies to regularly review contractors’ payslips provided by their umbrella companies, as well as tax filings and underlying assignment pay rates, to look for signs of tax avoidance or skimming. It’s the mark of a responsible agency to routinely check on their umbrella partners to ensure that they’re working with compliant companies. 

However, contractors should not rely solely on agencies’ vigilance alone and need to take responsibility for checking their own payslips. One way they can monitor their earning is to register for a Personal Tax Account with HMRC. This enables them to check that the money they earn is the same amount as that reported to HMRC via Real Time Information (RTI) submissions. If there are any discrepancies it might suggest that a contractor is involved in a tax avoidance scheme so it’s beneficial for them to conduct their own due diligence and be aware of scams such as the Two Payment Trick. It’s worth remembering that HMRC will discover any fraudulent activity and contractors will be required to repay any tax that is owed. 


An extra warning for contractors

While the new guidance is primarily aimed at agencies and their responsibilities, it sends a warning to contractors too. The message is that they should conduct their own due diligence on any recruitment agencies that they intend to work through, validate the pay rates that they are offered, research any alternatives to working through an umbrella company, and cross-check accounting procedures. The guidance is intended to improve transparency surrounding umbrella companies but this can work in contractors’ favour by offering them the honesty, choice and ethical treatment they deserve. The more information contractors have about working through umbrella companies and the whole supply chain, the more they will be reassured that everyone in that chain is operating compliantly, with their best interest at heart. 

If you’re concerned that you might be unwittingly involved with a tax avoidance scheme you can report the matter here. If you have a complaint about a recruitment agency you can report it here. You can also report a concern directly to the team at Professional Passport.


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