New HMRC Guidance Thanks to FCSA Action
by on December 7, 2023
The FCSA has been in discussion with HMRC about the guidance it offers to recruiters and contractors who engage with umbrella companies and has recently updated its web pages to reflect this.
In a press release, HMRC said that it recognises, “the harm umbrella company non-compliance causes to workers, legitimate businesses, and the tax system” and gave this as a reason why it has recently consulted on a number of potential approaches to bring umbrella companies, “within the scope of government regulation” adding a range of options to tackle non-compliance.
The government’s continuing efforts to improve the umbrella market, which builds on its consultation, have resulted in the new guidance that we see in its updates. It claims that the guidance will help recruiters understand their legal responsibilities, protect their business from non-compliant umbrella companies, and support umbrella company contractors, ultimately reducing the risk they run if and when they engage with non-compliant entities.
The guidance has been developed with input from both HMRC and the Department for Business and Trade as well as external experts such as the FCSA as part of its efforts to tackle non-compliance in the industry.
The guidance reinforces previous information about complying with employment and tax law when partnering with umbrella companies, particularly with reference to:
It also requires agencies to submit quarterly employment intermediaries returns, follow VAT requirements for operating self-billing, and be aware of the implications of receiving incentives or rewards from umbrella companies
Most importantly, however, is the updated guidance on supporting contractors which, by clarifying all the information they need to know, will enable recruiters to improve compliance and protect the businesses’ reputation.
This means that recruiters should:
Explain how the contractor will be employed and how an arrangement with an umbrella company works, as well as any other employment options that are available to them
Share information on working through an umbrella company with contractors so that they understand their employment rights and tax responsibilities
Be crystal clear about pay so that contractors understand the assignment rate will differ from the gross pay
The guidance makes it clear that for recruitment agencies that do not follow employment and tax law to the letter, there can be serious consequences, whether they were aware of the rules or not. The penalties can include prosecution, financial penalties, and being named and shamed. More detailed information about how they can comply with the law is given at the end of the document.
HMRC’s new guidance for contractors simplifies the previous information to clarify how an umbrella company works in tandem with a recruitment agency and outlines their rights as well as giving information on their pay.
It explains the process by which umbrella companies partner with recruitment agencies in order to pay contractors, the role all parties play in the supply chain, the importance of the off-payroll working rules, and how they can ensure their employment status is clarified.
It also outlines what rights a contractor has – the same employment rights as a ‘traditionally employed’ person, a written employment contract, being paid at least the National Minimum Wage or the National Living Wage, auto-enrolment into a pension, and holidays – and gives details about how they will be paid. This should include a breakdown of gross pay on a payslip, as well as any deductions they can expect to pay.
Most importantly it offers contractors information about what to do if their pay is higher or lower than they expect, which could indicate that they are being employed by a non-compliant umbrella company. And finally, it lets them know what to do if they are concerned about being involved in a tax avoidance scheme.
We welcome HMRC’s new guidance which we believe will go further in informing both recruitment agents and contractors of their rights and responsibilities, and support the actions and recommendations of the FCSA to improve information which, we believe, will lead to higher standards of compliance within the industry. We hope that it will be the start of a more rigorous approach to accountability and legislation in order to protect people from fraudulent, tax-avoiding organisations.
We invite both recruiters and contractors to download our latest guide: Navigating the Storm: Essential Strategies for Choosing the Right Umbrella Company which will give them the knowledge and resources necessary to make an informed choice about choosing the right umbrella company.