Understanding Umbrella Company Deductions [Sponsored Editorial]

Churchill Knight Umbrella is open to the idea of industry-wide umbrella company regulations [Sponsored Editorial]

The following editorial has been written for umbrellacompanies.org.uk by Churchill Knight Umbrella – an FCSA accredited umbrella company.

Recently, umbrella companies have been under fire in the news, most notably with the developments associated with mini umbrella company (MUC) fraud. While most umbrella companies (including Churchill Knight Umbrella) operate in full compliance with HMRC regulations and UK tax law, some are giving the industry a bad name and are putting innocent contractors, freelancers and agency workers at risk of non-compliance. There is no better time than the present to introduce industry-wide regulations to ensure the umbrella company sector acts ethically, compliantly, and in the best interests of the UK’s temporary workforce. However, before doing so, the government has a lot of considerations to take on board.

Overview

There is no excuse for recruitment professionals making unofficial and non-compliant referrals. There is presently enough legislation and guidance in place to ensure these don’t occur within the sector. However, where there is an opportunity for greedy, immoral agents to make back-handed money at the expense of temporary workers, there will always be an element of demand for tax avoidance schemes, and criminals are fully aware of this.

The same applies to contractors, freelancers and temporary workers. It’s common sense to assume that you should be eligible for UK taxes and National Insurance Contributions if you’re conducting working within the UK. Therefore, anyone who deliberately seeks additional pay retention because they’re unsatisfied with PAYE should know better. Thankfully, a majority of contractors understand their tax responsibilities and are referred to legitimate businesses that will help.

The umbrella industry is unregulated. However, two self-regulating bodies ensure their members are compliant with all UK tax law and regulations, and they will be discussed in more detail later in this article. These well-known organisations are doing an excellent job for the entire supply chain. Recruiters can be sure they’re referring to trustworthy, compliant accountants and payroll providers, and workers can be sure they’ll pay the correct taxes. Assuming everyone in the supply chain only interacted with members of these two bodies – there would be no need for government intervention.

Frustratingly, new scandals involving criminally-backed umbrella companies have come to light, and the marketplace appears to need support in tackling and closing these arrangements. Whether they are engaged deliberately or by mistake, they should not be accessible.

Temporary workers deserve protection

Compliant umbrella companies process the payroll of their employees (PAYE). While most UK-based umbrella companies are moral, there are a few that are promoting tax avoidance. Engaging with these companies could land temporary workers in serious trouble with HMRC. Tax avoidance isn’t technically illegal, but HMRC is retrospectively going after those believed to have underpaid tax and National Insurance.

In some cases, contractors are being pushed in the direction of non-compliant payroll providers, and by definition, this is ‘criminal’. It’s unacceptable that there are tax avoidance facilitators out there acting in their self-interest and who are happy to throw contractors into the deep end with no explanation. In several cases, temporary workers have been entirely unaware that they’ve engaged with a tax avoidance scheme. It has only been brought to their attention when they received a letter from HMRC.

Most recently, in an article published by the BBC, an innocent contractor working for G4S at a Covid vaccination centre suspected something dodgy was going in when they received their payslip. An unfamiliar third-party organisation (mini umbrella company) was paying the worker, and according to Companies House, it had only recently launched. The company, fronted by a Filipino director, was a mini-umbrella company and essentially was created to help recruitment agencies avoid their fair share of taxes. Effectively, recruitment agencies making non-compliant referrals are financially benefitting by putting their candidates at serious risk. However, it is worth noting that a significant majority of recruitment agencies wouldn’t dream of making unethical referrals.

The Criminal Finances Act 2017 was introduced by the government to try and stop facilitators of tax avoidance schemes. This should have deterred unethically motivated recruitment agencies from referring their candidates to tax avoidance schemes. However, the recent mini umbrella company scandal has taught us that non-compliant referrals are still taking place. More needs to be done to ensure the Criminal Finances Act 2017 is adhered to.

No temporary worker should ever have to worry about their payroll. However, too many rogue recruitment agencies are prepared to make dishonourable referrals as a method of boosting profits. Therefore, if the government introduced strict regulations on the umbrella company industry, it may help give workers the peace of mind they deserve. However, rolling out regulations within the sector will require a lot of thought and planning, and the government must ensure the entire supply chain pulls together to do its part to protect workers from non-compliance.

Compliance is critical for the ensure supply chain

Whether a contractor registers with Churchill Knight Umbrella or a competitor, they must use the services of a compliant umbrella to ensure they pay the correct amount of tax and National Insurance.

Both the FCSA and Professional Passport are experts within the temporary staff industry. They both offer accreditations to payroll providers, accountants and recruitment agencies that want to show their sector that they are committed to compliance. If recruiters only referred to organisations with accreditation from one of these bodies, they would have nothing to worry about, nor would their candidates. If regulating the sector will help achieve this, the changes would almost certainly be welcomed by all UK-based umbrella companies and their employees. However, should the umbrella company marketplace be regulated by the government, the points below would need to be addressed.

Recognition – It would be extremely useful if the government publicly backed umbrella companies. They are happy to mention umbrella companies on their website, but they’re not willing to endorse them. We’re not sure why this is. Umbrella companies help temporary workers pay the correct tax and National Insurance Contributions. Consequently, umbrella’s should be recognised as a good thing.

Code of conduct – Umbrella companies should have to prove they operate compliantly. Both the FCSA and Professional Passport have developed compliance standards that their accredited members must abide by. Both accreditations should be government-backed. If the government decides to create a new code of conduct for umbrella companies, they should be based on the FCSA and Professional Passports versions. It should be made clear that any business accredited by the FCSA or Professional Passport is also given a stamp of approval by the government.

Education – Many umbrella employees are new to the concept of using an umbrella for payroll purposes. The government recently released a piece of guidance called ‘Working through an umbrella company’. It provides an overview of how they work and what workers should expect to retain financially. This is a start, but there need to be plenty more official resources to help people make well-informed decisions about their payroll.

Barriers – A marketplace with competition is great for consumers because it gives them choice, and regulations should not stop new umbrella companies from launching in the UK. However, mini umbrella company fraud has proven how easy it is for criminals to manipulate the existing rules and to target stakeholders in the supply chain. There must be a series of entry requirements into the umbrella company marketplace, and if an organisation doesn’t meet the requirements, they cannot trade until they do.

Referrals – The Criminal Finances Act (2017) was introduced to stop facilitators of tax avoidance schemes. Since it was rolled out, there has not been many cases where people or organisations have been held accountable. This is disappointing, especially with mini umbrella companies making the headlines again. Regulating the industry must include procedures to appropriately punish bodies that deliberately break the rules by facilitating tax avoidance.

Reporting – The government needs to open a dedicated ‘Umbrella Compliance Department’ to protect temporary workers and to quickly address queries and concerns. If an umbrella is acting suspiciously, or an employee has concerns, they need protection and quick answers.

Punish the intentional tax avoiders

Unfortunately, it’s no secret that some professionals are desperate to increase their pay retention by any means necessary. Our Sales Department frequently speak with contractors who refuse to use our service –  not because they don’t like our company, but because they’ve talked to another payroll provider promising them significantly higher pay retention. Quite often, contractors behaving in this way have suddenly found themselves inside IR35 and do not like the lower-earning potential with an umbrella company – compared to operating through a personal service company (PSC). Their frustrations are wholly understandable, but engaging with a tax avoidance scheme is not the answer.

Churchill Knight Umbrella processes all of our employees’ payments with HMRC’s tax system ‘Pay As You Earn’. Therefore, any umbrella company offering contractors noticeably higher pay retention is almost certainly acting unethically. Temporary workers should avoid these companies at all costs, and they should be fully aware of the risks involved.

If the government can prove that a worker had deliberately avoided tax, they should not hold back when reclaiming lost funds down the line. However, the Loan Charge (2019) had seen many workers with good intentions face life-changing penalties because they’ve engaged with tax avoidance schemes by mistake. If the industry is to be regulated, more needs to be done to protect people who fall within this category. Deliberate tax avoiders deserve punishment. Accidental tax avoiders deserve compassion and understanding. As part of the regulations, the Loan Charge should be re-evaluated.

Ciaran Woodcock, Head of Field Sales & Marketing at Churchill Knight, shared his views on the regulating the umbrella company sector.

“Umbrella companies are continuing to receive negative press, and it’s deeply concerning. It frustrates me how a tiny minority of umbrellas have tainted the industry’s reputation – especially the reputation of umbrellas that take compliance extremely seriously – Churchill Knight Umbrella included. What bothers me the most is how some recruitment consultants deliberately put their candidates’ welfare at risk to earn referral rewards from a tax avoidance scheme. This is disgraceful. The Criminal Finances Act was supposed to stop non-compliant referrals. However, I cannot remember reading about recruiters subjected to an HMRC investigation as a consequence, yet non-compliant referrals are still occurring.

If recruitment agencies took their responsibilities seriously, they would only refer candidates to FCSA or Professional Passport accredited umbrellas. There would then be no need for the government to regulate the industry. The FCSA and Professional Passport work tirelessly to ensure the supply chain of temporary workers is compliant with HMRC rules and regulations. In my opinion, they don’t get enough credit. 

Churchill Knight is committed to compliance, and we identified FCSA accreditation as the best way to showcase this. I won’t bore you with the details, but obtaining FCSA accreditation was no mean feat. It was a huge commitment. We’re immensely proud to be a member of the FCSA because it shows the entire industry that we work tirelessly to remain compliant with UK tax law and always protect our employees. As far as I am concerned, FCSA accreditation is more than sufficient for regulating the industry. Have you seen their Codes of Compliance?

Ultimately, if the government decides to independently regulate the industry – I am for it. As long as workers are protected, professional bodies are acknowledged, and far more is done to help educate the entire supply chain about UK tax laws and regulations. Tax avoidances schemes need to become a thing of the past. The government should consult the FCSA and work alongside them moving forward. There have been many publications by interested stakeholders about regulating the umbrella company sector – some of whom have offered to help. However, I’m not sure how creditable they are. Should the government put regulations in place, it’s my opinion they should only consult trustworthy, respected organisations throughout the process. I’ve mentioned the FCSA, but they should also work with specialist contractor-oriented experts such as Professional Passport, IPSE and ASPCo – to name a few.”

About Churchill Knight Umbrella

Founded by experts with over 20 years’ experience in the contractor payroll sector, Churchill Knight Umbrella is an FCSA accredited umbrella company. Our reliable PAYE payrolls service is the first-choice for thousands of contractors very week, and we’re expanding at an exciting rate. Churchill Knight Umbrella is dedicated to providing our umbrella employees with an efficient and compliant service.

If you’re a contractor considering using an umbrella company for an upcoming assignment, please contact Churchill Knight Umbrella today for a free, tailored take home pay projection. Alternatively, you can call our professionals on 01707 871622, or send us a message here.

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