There is no shortage of umbrella companies providing payroll services for contractors.
A recent study by the Low Incomes Tax Reform Group (LITRG) concluded there are over 500 in the United Kingdom.
While picking a compliant umbrella ensures you comply with HMRC’s rules and regulations, with so many to choose from, how do you know which ones you can trust and which should be avoided at all costs?
In this article, we explain how compliant umbrella companies operate and whether or not HMRC officially approves any umbrella companies.
What is HMRC’s stance on umbrella companies, and do they approve any UK-based payroll providers?
The Labour Market Enforcement Strategy 2022 to 2023, an independent government report compiled by Margaret Peels, Director of Labour Market Enforcement, unveiled that over half a million contractors use umbrella companies for their payroll in the UK.
Therefore, HMRC is unquestionably aware of the importance of umbrella companies in the supply chain of temporary workers – especially since off-payroll working rules changed in the private sector (2021).
This rule change resulted in tens of thousands of contractors requiring PAYE payroll providers for assignments because they could no longer operate through a personal service company (PSC).
The government has also released numerous reports and guidance online about umbrella companies.
Published on 25 August 2022, the government released guidance called “Warning for agency workers and contractors employed by umbrella companies (Spotlight 60)”.
In this online guide, insightful information about tax avoidance schemes is covered, including how non-compliant umbrella companies operate, signs you may be involved with an avoidance scheme, why the arrangements do not work, and how to seek help if you are worried about past or current engagement with an unscrupulous umbrella company.
While acknowledging “many umbrella companies are compliant with the tax rules” in Spotlight 60, HMRC does not actively endorse or promote any umbrella companies, and does not approve any providers in the United Kingdom. This is clarified in the following snippet taken directly from Spotlight 60:
Some umbrella companies or people promoting them claim that their tax arrangements or tax avoidance schemes are HMRC approved. HMRC never approves avoidance schemes or the compliance of any umbrella companies.
Despite not officially approving any umbrella companies, HMRC has released several pieces of valuable guidance for contractors, freelancers and the supply chain of temporary workers (especially staffing agencies).
In these guides, HMRC clarifies how compliant umbrella companies should operate, and the warning signs and associated risks of engaging with tax avoidance schemes.
Therefore, while HMRC does not approve umbrella companies, they do recognise their role and importance.
Check the government’s website for more information
It is worth checking the government’s website regularly to keep up to date with the latest guidance to help protect you from non-compliant umbrella companies and the associated risks of tax avoidance. The government is adding new content frequently, including guidance, corporate reports and Spotlight posts to help you identify specific types of tax avoidance schemes.
Is the government likely to approve umbrella companies in the future?
It is uncertain whether the government will decide to approve umbrella companies in the future, but it is unlikely. Approving individual umbrella companies would be highly labour-intensive, and nothing stops an “approved” umbrella company from changing how they operate once HMRC has given them the seal of approval.
However, on the back of high-profile cases of umbrella non-compliance, industry stakeholders have called for the government to regulate the currently unregulated umbrella company sector.
For example, a leading umbrella was recently accused of salary skimming – a process that involves disguising deductions on an employee’s payslip and retaining more than just the stated umbrella company margin.
Another high-profile case involved an umbrella allegedly retaining the holiday pay of its employees rather than ensuring it was processed fairly.
Unquestionably, the reputation of the umbrella company sector has been heavily damaged on the back of these accusations.
In the United Kingdom Labour Market Enforcement Strategy 2022/23, Margaret Beels, revealed “the Government has committed to regulating umbrella companies which will be a welcome step towards achieving compliance”. The timeframe has not been released. While the government’s intentions sound like a positive step to protecting contractors and freelancers from non-compliant tax avoidance schemes, similar pledges have been made in the past with no follow up.
While the umbrella sector remains unregulated by the government, it is worth noting that two professional bodies, The Freelancer and Contractor Services Association (FCSA) and Professional Passport, self-regulate the sector and offer umbrellas (that can prove their compliance with HMRCs rules and regulations) a professional accreditation.
It has now become popular amongst compliance-driven staffing agencies to only refer temporary candidates to an FCSA or Professional Passport accredited umbrella – to protect the business against the threats of legislation such as the Criminal Finances Act 2017 and to ensure candidates are in the very best hands for their payroll.
There are no HMRC-approved umbrella companies, and the sector remains unregulated. However, in a recent report (The Labour Market Enforcement Strategy 2022 to 2023), the government suggested regulations are coming in the future, potentially leading to HMRC approving specific umbrella companies.
Although there are no officially HMRC-approved umbrella companies, a lot of official guidance is available to help you make a well-informed decision regarding your payroll.
It is crucial you can distinguish between compliant and non-compliant umbrella companies and understand the risks of tax avoidance schemes.
You must conduct thorough due diligence to ensure you pay the legal amounts of tax and NI to avoid any HMRC penalties in the future.
It is important to remember that you are responsible for your tax affairs, and even if you have used a tax avoidance scheme by mistake, HMRC can still hold you accountable, and you may need to repay any underpaid tax and NI.