HM Revenue & Customs has released new guidance for recruitment firms on using umbrella companies, outlining steps to safeguard their operations and protect workers from non-compliance within the supply chain. 

“Many umbrella companies follow the tax rules, but some do not,” the HMRC said in a statement. “They may not pay all the money owed to workers or to HMRC.” 

Guidance on preventing illegal work includes checking that umbrella companies are carrying out and recording right-to-work checks on temporary workers.  

Accepting gifts (including money) may encourage any supply chain company to either improperly perform its functions or activities, or reward it for having already done so. 

HMRC’s guidance also addressed paying tax and any national insurance contributions on cash incentives or rewards that employees receive directly from an umbrella company. 

Incentives or rewards the recruitment firm receives from an umbrella company (like payment for inclusion on a preferred supplier list) is often considered taxable income or profits. 

Recruitment firms face consequences for being involved in non-compliant supply chains, the HMRC warned. If an investigation reveals such involvement, firms may be prosecuted for failing to prevent the criminal facilitation of tax evasion within the supply chain. 

Additionally, HMRC may deny the recovery of VAT (value-added tax) input tax and impose penalties if the business knew or should have known it was connected to VAT fraud. Firms could also face penalties if they are found to have used an umbrella company engaged in tax avoidance or participated in the design, marketing or facilitation of tax avoidance schemes. 

Separately, the HMRC published a tool to estimate what gross and net pay (take-home pay) should come from an umbrella company for a single role. 

“This latest HMRC guidance casts an important spotlight on helping agencies to navigate the complexities of the umbrella industry and I welcome the introduction of a payslip checker as we applaud any action and steps taken that works to increase and promote compliance across the market,” said Crawford Temple, CEO of Professional Passport, a UK-based independent assessor of payment intermediary compliance, in a press release. “We understand that this is the first stage in the tool’s development, with further updates likely.”