​The rise of the unscrupulous Umbrella Company

4 months ago contracting in the public sector changed indefinitely. In fact it was the biggest change seen in recruitment since AWR was introduced in 2011.

As providers of social work locums it was inevitable that the new off payroll working legislation for those in the public sector was going to affect us. Traditionally and up until April 2017 many social work locums operated through their own limited company, many of whom had worked this way for years. However, this was set to change. The off payroll legislation that was introduced proved to be the nail in the coffin for locum social workers operating through limited companies and we saw the majority of social workers opt to work through an umbrella company instead.  

At Charles Hunter Associates like most social work recruitment agencies, we are not unfamiliar with umbrella companies. They have always had a part to play in facilitating payments for locum social workers and we enjoy positive relationships with a number of them. These are umbrella companies that operate fully audited and compliant payment processes which is essential to stay in line with HMRC requirements for tax purposes. It is crucial that any umbrella company that a social work locum wishes to use is vetted to ensure they are operating in the UK and not classed as an offshore intermediary. It is also important to ensure that any such umbrella company is deducting PAYE employment taxes from the contractor and that no other income that would be seen as ‘taxable income’ is being paid to the social work locum without statutory tax deductions.

The social work locum market as a whole saw a mass transition of workers move from limited company to umbrella company in April of this year. This has required Charles Hunter Associates to ensure tighter control of the umbrella companies that contractors wish to use. Partly this is because by law we have to ensure that the umbrella companies are in line with intermediaries legislation. However, we also morally are obliged to ensure our social work locums are working through payment companies that are 100% compliant with statutory UK tax obligations. For this reason we introduced both a PSL and a list of fully audited umbrella companies that pose minimal risk to our workers. These are companies that work to rigorous standards, pay PAYE taxes on income and advocate for their industry.

Regrettably however,  it seems that the new off payroll legislation became an opportune moment for an increasing number of ‘lesser known’ payment companies and even new to the market companies to offer high % take home pay (often 80%+) when working through their umbrella company services. We even witnessed small accountancy firms switch their offering to umbrella without the knowhow or expertise to do this. To a social work contractor who wants to maximise their income, this can seem an attractive proposition. However the main issue here is that if it seems too good to be true then it is! If you are a social worker who is inside of IR35 (vast majority) then you are subject to PAYE taxes and as such your take home will average at max 68%. Anything over this is a sure indication that the company touting its services is most certainly a culprit of tax avoidance.

The biggest worry is that this blatant tax avoidance through unscrupulous umbrella companies is being favoured by some social workers so that they can take home more pay. This is an open door to disastrous and significant back claims in unpaid tax. The worst thing of all is that when HMRC comes knocking on the doors of umbrella companies who are operating avoidance schemes, they will simply cease to exist, unable to pay their debts. HMRC will then cast its eye on the social worker and they will ensure that they get their tax back.

This is a very real and worrying issue. The umbrella company market has a good number of high quality companies that are working well within the requirements of HMRC when it comes to tax and operations. Yet this market is tarnished by the every growing number of umbrella companies that are not operating as they should be.  We at Charles Hunter Associates want our contractors to be protected, and to know that they are using payment companies that are accredited and risk free. After all – would you openly wish to avoid tax?

With the introduction of the criminal finances act in September this has become a hot topic. The recommendation of the use of unscrupulous umbrella firms with the intent in avoiding tax will become a criminal offence should it be facilitated by a recruitment agency. Hopefully this will put a stop to the rise in umbrella firms with practices that are less than desirable and further create awareness to vulnerable contractors who are not wise to such risks.

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If you are not 'umbrella aware' and you need advice and assistance then call Charles Hunter Associates today on 0118 948 5555.

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Charles Hunter Associates is an established specialist recruitment business operating in the Social Work and Social Care sectors.