Guidance

Responsibilities for employment businesses working with umbrella companies

How to protect your employment business, and the workers you supply, from non-compliant businesses in your supply chain.

As an employment businesses (sometimes called a recruitment agency) you find workers for other businesses (sometimes called end clients).

You may use umbrella companies to employ those workers. The umbrella company will usually be the worker’s employer and is responsible for:

  • paying the worker’s wages
  • operating PAYE as part of their payroll

While many umbrella companies operate legally and compliantly, some do not. They may not pay all the money owed to the worker or to HMRC.

Working within the law

As an employment business, you must comply with employment and tax law when working with umbrella companies, including requirements for:

You must:

  • submit the quarterly employment intermediaries return for workers you place with end clients where you do not operate PAYE including umbrella company employees

  • operate PAYE where the workers you supply to a UK end client are employed by an overseas employer such as an umbrella company with no UK presence, under the rules for offshore intermediaries unless someone else operates PAYE on your behalf

  • follow the VAT requirements for operating self-billing with an umbrella company

  • pay tax and any National Insurance contributions on any cash incentives or rewards your employees receive directly from an umbrella company

  • include incentives or rewards your business might receive from an umbrella company, like payment for inclusion on a preferred supplier list, as part of taxable income or profits under the rules for income tax and rules for Corporation Tax

  • prevent illegal working, including checking that umbrella companies are carrying out and recording right to work checks on temporary workers, as set out in the Immigration, Asylum and Nationality Act 2006

  • not agree to or accept gifts including money which encourage any part of the supply chain to perform their functions or activities improperly or rewards them for having already done so, as set out in the Bribery Act 2010

Supporting workers

Workers can find being employed by an umbrella company confusing and working for a non-compliant umbrella company can cause them problems. Supporting workers can mean you’ll receive fewer queries, improve compliance in your supply chain and help protect your business’s reputation.

Explain how the worker will be employed

Explain how the umbrella company employment arrangement will work to the worker, as well as any other options for arranging employment that might be available to them, so that they can decide if it’s right for them.

You should share information on working through an umbrella company with workers. This will help workers understand employment rights and tax responsibilities.

Be clear about pay rates

Be clear about pay rates when you advertise a job and when you discuss roles with prospective workers.

You should be clear that:

  • the assignment rate (sometimes known as the contract or uplifted rate) is the rate that you will pay the umbrella company not the worker
  • the worker’s gross pay will be less than the assignment rate

Issue Key information documents (KIDs)

You must provide workers with a Key information document (KID) under the Conduct Regulations 2003.

KIDs need to to be issued when workers first register with you, before you provide any work-finding services. They must be updated and reissued when there are significant changes.

Some umbrella companies will have created KIDs for employment businesses to use. However, it is always your responsibility to issue KIDs and this cannot be deferred to a third party like an umbrella company.

Before a Key information document is issued make sure:

  • it contains the name of the umbrella company
  • it is clear, accurate and covers only the required information
  • any information you need to complete the KID has been obtained from the umbrella company in writing
  • that you have a process for getting updated information from the umbrella company when things change

For support completing a KID contact the Employment Agency Standards Inspectorate (EAS).

What happens if you work with umbrella companies that do not follow employment and tax law

There can be serious consequences for your business if you are involved in non-compliant supply chains and do not take reasonable measures to avoid this. A non-compliant supply chain might include umbrella companies who do not follow employment and tax law.

In most circumstances, claiming that you were not aware of non-compliance is not a defence. 

If HMRC investigates and finds you are involved in non-compliant supply chains, we may take action. This includes but is not limited to:

The Employment Agency Standards Inspectorate can: 

The Gangmasters and Labour Abuse Authority (GLAA) issues penalties for criminal offences under the Gangmasters (Licensing) Act 2004, including those who use unlicensed umbrella companies in the sectors covered by the GLAA.

If HMRC, the EAS or GLAA take action against your business, it can damage your business’ reputation and ability to secure and maintain contracts and business relationships with end clients and workers.

Protecting your business

To protect your business you should understand your supply chains and take action if you spot non-compliance.

It is your decision whether to work with an umbrella company and you should not do so if you suspect they are not compliant, even if a worker requests it.  

Due diligence

Only use umbrella companies that you have carried out due diligence on.

You should:

  • identify the entities in your labour supply chain
  • understand how workers are being engaged and paid
  • assess and reduce any risks of non-compliance

The checks you undertake should be regular, reasonable and proportionate for your business.

You should keep a record of the due diligence checks that you have undertaken on an umbrella company.

You should:

  • make sure that if workers ask to work through a particular umbrella company, this is not because increased take home pay or additional untaxed payments they have been promised by the umbrella company, which can be signs of tax avoidance

  • find out if the umbrella company is outsourcing its employer responsibilities to a third party, and do due diligence on that third party

  • check the umbrella company is VAT-registered, charging VAT, and the details provided by the umbrella company match

  • check the umbrella company details you have match those registered with Companies House

  • get reconciliation statements directly from the worker (where they have them) to check the assignment rate matches the money you have sent to the umbrella company

  • get payslips directly from the worker to check the umbrella company is acting as the employer and operating PAYE

  • check payslips and reconciliation statements you have obtained from workers for unexplained deductions (sometimes called skimming), tax avoidance or underpayment of National Minimum Wage

  • check the name of the umbrella company corresponds with the bank details provided by the umbrella company

  • check the umbrella company has the required insurance including employers liability insurance

  • check the accreditation status any umbrella company claims to hold with the relevant body

  • check whether the umbrella company holds a GLAA licence on the GLAA website if it operates in a sector covered by the GLAA

Umbrella companies can be involved in many forms of tax non-compliance and there are checks you can carry out to identify them.

These checks:

Signs of mini-umbrella company fraud can include:

  • regularly having to reissue KIDs to workers because the umbrella company keeps changing
  • differences between the employer’s name on the latest KID and the latest payslip
  • frequent changes to the PAYE reference number which may be included on payslips

Your end client may also want evidence that the umbrella company is the employer and operating PAYE to ensure compliance with off-payroll working rules. You should share this if asked.

Reduce your risk

Structure your supply chains in a way that is easy to understand. You can do this by keeping your supply chains as short as possible. This makes it easier to carry out due diligence and lowers the risk of non-compliance further down the chain, particularly by fraudulent umbrella companies. 

Give your staff training to help them identify non-compliance within your supply chains and have clear procedures on how to report it.  

If you think that an umbrella company in your supply chain is operating non-compliantly report them to their accreditation body if they belong to one.

Report concerns

You can report tax fraud and avoidance by a person or business to HMRC .

You can report concerns about pay and work rights including National Minimum Wage, employment agencies, gang masters, or working hours.

Updates to this page

Published 30 November 2023

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