Why HR should carry out audits on recruiters and umbrella companies

With the new IR35 rules seeing more contractors starting to work through umbrella companies and the rise of tax avoidance schemes, it is vital employers know their partners in the supply chain, says Crawford Temple

The former US deputy attorney general Paul McNulty once said: “If you think compliance is expensive, try non-compliance.”  It is a comment that resonates loudly in the contingent labour market and never more so since the introduction of the off-payroll legislation into the private sector in April this year. 

The new rules mean that the responsibility for assessing the IR35 status moves from the contractor to the end hirer so making an accurate assessment is critical to the compliance process from the outset and any mistakes will likely lead to liabilities. Strict policing of the supply chain is vital. 

The new rules have prompted more companies to blanket ban their limited company contractors, which has led to an increase in the number of contractors now working through umbrella companies.  In turn, that has led to a proliferation of providers purporting to be umbrellas when the reality is they are tax avoidance schemes duping unwitting contractors into signing up for them, often with the promise of more take-home pay.

Therefore, it has never been more important for hiring firms to get to know their associates throughout the supply chain, and take steps to know that their recruitment partners and the umbrella firms that they work with are operating to the most rigorous compliant standards that will stand up to robust interrogation and investigation.

It starts with a Status Determination Statement (SDS). Once an assessment has been conducted, an SDS must be created, and the end client needs to pass it on to both the PSC worker and the party directly below it in the contractual chain, which is usually a recruitment agency. In longer supply chains, there may be other parties involved.

Knowing your recruiters are working with approved partners in the supply chain who have been compliance accredited is vital. With many contractors deemed inside IR35 opting to work through umbrella companies, it is imperative that clients understand how a compliant supply chain operates and what to look for in a non-compliant one.

What steps can HR take to check credibility of other parties?

There are a number of steps you can take to check the credibility and compliance of other parties in the supply chain and you can add specific requirements to your contracts with your recruiters so that you secure assurances and reassurances.

You can start by checking out your recruiters. Do they have a good financial position? At the very least you should be running a credit check, and you should also investigate their accounts – if independently audited then you can feel reassured that the figures given are true. You should also check for issues such as conflicting business interests, previously failed businesses, financial difficulties and offshore connections.  

You will also want to check their contracts of employment (umbrella), insurances and levels of cover.  You are well within your rights to request to see a copy of their insurance certificates, VAT certificate and certificate of incorporation. 

Don’t forget you are trusting your partners with large sums of money, so you will need to be assured that they are genuine and have appropriate cover in place. And ask your recruiters to confirm the names of the intermediaries they work with and run similar checks on those.

Such an audit would identify the following: 

  • A high-risk provider: one more likely to be a disguised remuneration scheme where malpractice and unethical behaviour is occurring. 

  • A medium risk provider: where there is no evidence of non-compliance, but no evidence that their services have been verified for compliance either.
  • A low-risk umbrella provider: one which holds a recognised compliance accreditation certificate and is unlikely to pose any sort of threat to the supply chain.  

An increasing number of recruiters work only with approved providers, but it is important that end clients do their own checks and put processes in place to ascertain compliance. Compliant umbrella firms offer a legitimate contractor management solution that gives individuals all the benefits of employment while working on a variety of assignments.

Good umbrella companies are also open and transparent in their dealings with workers and provide a clear contract of employment that explains how they will be paid, what deductions there will be and for what, how their expenses are paid and how their holiday pay is worked out. Open transparent communication is key throughout the supply chain and end clients, especially HR professionals, must educate themselves about how umbrellas work so that they can feel assured that they are part of a compliant chain.

So, I would urge hirers to have honest conversations with their recruiters and ask key questions and understand the warning signs and what to avoid when looking at the providers in the market. The importance of implementing effective compliance processes cannot be overstated. Non-compliance does not pay. I think Paul McNulty summed it up well.

Crawford Temple is CEO and founder of Professional Passport