HMRC publishes Spotlight 64, cueing up umbrella company regulation plans

HMRC is bracing contractor recruitment agencies who use umbrella companies in its latest anti-avoidance series Spotlight.

But rather than being merely a new edition, Spotlight 64 is unique for being linked to the government’s plans to regulate umbrellas.

It may even be the very guidance that contractors were told on Tax & Administration Day to expect as part of the regulatory plan.

“Despite there being very little detail on the progression of regulation of the umbrella company market… on 18th April, there was mention of HMRC publishing more guidance.

“Well, Spotlight 64 [has now been] published -- just four days later,” Brookson Group boss Matt Fryer told ContractorUK.  

'Agencies should check umbrellas' product claims very carefully'

Spotlight 64 says agencies “should” move to “check very carefully the details they are given by umbrella companies about their products.”

HMRC also advises recruiters to “consider taking independent professional advice” if they doubt an umbrella’s compliance.

To Clarity Umbrella, the recommendations stem from the April 18th update saying HMRC is “minded” to introduce ‘due diligence’ on agencies.

'Sign of what's to come'

“HMRC may be taking it slow on umbrella regulation, but this seems to be a sign of what’s to come,” Clarity’s Lucy Smith began in a statement to ContractorUK.

“Remember, the three-paragraph update on TAD day on umbrellas did little to address the part of the consultation that proposed possible debt transfer through the supply chain.

“However then this ‘guidance’ was released via Spotlight 64. Is this HMRC starting to drip feed the potential for debt transfer?

“So without proof of due diligence checks on the businesses that the agencies are engaging with, maybe the debt transfer will kick in?”

'Agencies could be liable to pay tax liabilities'

In line with Smith’s assessment, HMRC's Spotlight 64 juxtaposes both of the separate proposals -- due diligence, and debt transfer, saying:

“The government recently consulted on options to tackle non-compliance in the umbrella company market, including:

• Penalties for agencies failing to carry out mandatory due diligence
• Additional circumstances in which agencies could be liable to pay tax liabilities.”

The consultation had a third option – to deem the agency supplying the contractor the “employer for tax purposes” (rather than the end-client).

'Recruiters must carry out due diligence'

But this proposal, arguably the most onerous on agencies out of the three, isn’t mentioned in Spotlight 64 whereas due diligence is; twice.

“Agencies need to avoid recommending…schemes…[and] must also carry out due diligence to make sure they are not using non-compliant umbrella companies,” reiterates Spotlight 64.

The message of intent from HMRC and by extension the government looks pretty clear according to tax lawyer Rebecca Seeley Harris.

'Useful insight'

“In the absence of any legislation on the regulation of umbrella companies, Spotlight 64 is a welcome development. 

“It provides some useful insight into what to be aware of”, Seeley Harris, founder at ReLegal Consulting told ContractorUK.

The lawyer advises that thanks to Spotlight 64, contractors can now “ask their agency” - pointing to the HMRC resource - what due diligence steps they take.

'Ignore this wake-up call at your peril'

Formerly a tax inspector for HMRC, Tom Wallace describes Spotlight 64 as a “wake-up call.”

“Ignore [this] at your peril,” says Wallace, head of tax investigations at WTT Group.

Mainly addressing agencies, he continued: “By getting entangled with such schemes, even unwittingly, agencies open themselves to severe reputational and financial damage.

“HMRC's enablers legislation allows them to publicly call out anyone facilitating defeated tax avoidance - a career-ending brand hit. You could also face stinging penalties and liabilities when these schemes inevitably unravel. 
 
“As an agency, protecting your business from these threats must be paramount. Conducting robust due diligence on umbrella partners is now essential.”

'Now is the time for agencies to act'

At Clarity Smith echoed: “If there was ever a ‘hint’ for agencies to get their business arrangements in place, now is the time.

“It doesn’t look like there will be any excuses moving forwards for not doing appropriate checks on the businesses they choose to engage with.

“That said, what the ‘appropriate checks’ will look like, is yet to be seen. Maybe this will sit happily alongside the regulation when we finally get to see the outcome.”

In Spotlight 64, which contains five red flags for agencies to look out for, HMRC says the government’s response to the June 2023 consultation will be published “in due course.”