Protecting your business when working with Umbrellas

HMRC has recently updated guidelines for umbrellas, and individuals who work through an umbrella. There has also apparently been a surge in umbrella accreditation services. Does accreditation actually address the issues identified in the government’s consultation on how to regulate the umbrella company market which was announced earlier this year?

Last summer the government ran a consultation on tackling non-compliance in the umbrella company market. The proposals included imposing mandatory due diligence on recruitment businesses, with harsh penalties for getting it wrong. Needless to say, this approach was not particularly welcomed by affected employment businesses, which are already exposed to potential tax risk where an umbrella is not compliant with tax regulation. However, the government’s thinking was that proper due diligence would minimise risk and eliminate the problems.

We believe that the current approach to due diligence is flawed. This is because it typically relies on either auditing, after-the-event review, or accreditation. However, the evidence suggests that these methods are not entirely effective on their own. Firstly, auditing, whether conducted by software or humans, can only check a disclosed sample at the time of the audit. It cannot guarantee complete compliance with regulations. Secondly, reviews conducted after the event can only prove past performance. They cannot ensure ongoing compliance. Finally, relying on an accrediting body doesn’t work either. This is because no party, whether an accrediting body or otherwise has a meaningful ability to enforce breaches of compliance. So, what on earth can an employment business do to achieve a suitable level of due diligence to nullify risk?

The appeal of some kind of accreditation remains strong if only to avoid every recruitment business from having to undertake due diligence over and over again. Bearing in mind that the purpose of the government initiative is to address the exploitation of workers, non-compliance, and tax avoidance, we believe the only effective solution should be government lead. Following the above logic and the fact that no audit as such can look into the future, the Association of Recruitment Consultancies (ARC) proposed that the government should operate a registration scheme of umbrella companies. Common sense dictates that non-compliant umbrella companies are unlikely to apply, and the government can enforce compliance breaches by removal from the register. Compliant registered umbrellas will be secure in the marketplace, with no due diligence required or risk to recruitment business, and importantly non-compliant umbrella companies would be a thing of the past.

So far there has been no update from the government, and with an election in the offing for 2024 the politicians probably have more pressing matters on their minds. For now, the concept of self-regulation by accreditation and audit to provide recruitment businesses with comfort remains in place. This is despite the evidence referred to above and the government’s own evidence of non-compliance. New accreditors and due diligence services appear to be emerging and so, given that their objective is to provide comfort against future liability, is that comfort illusory and are their services really worth considering?

If the current method of self-regulation doesn’t work, why would another private accrediting organisation be any different? Can any such organisation provide recourse or compensation to a recruitment business if there is non-compliance? Are assurances of satisfactory audit or review worth the paper they are written on, for example by being backed up by genuine and effective insurance?

Whatever the government does, the easiest and most economical way to get immediate protection with little risk is to use a properly protective contract with each engagement with an umbrella company you have first checked meets your security criteria. Imposed once only as a framework requirement, there need be no ongoing charges or compliance processes beyond the occasional check. Protection in the contract should include a suitable guarantee by at least one director of the umbrella company, as recommended in government guidance. After all, the directors are the only ones who really know how their business is operating.

If due diligence becomes mandatory, any regulatory liability will not arise unless the umbrella company is non-compliant. Whether or not the due diligence has been done correctly, the contract terms can be relied on to provide a route to compensation.

Lawspeed offers a reliable and proven model contract that is readily available for employment agencies and hirers to use. By taking advantage of this solution, you can avoid considering other costly options and have the contract in place within a matter of days. Contact us today on 01273236236, or email [email protected].