‘Due diligence’ when IT contractors assess umbrella companies looks like this…

While mandatory ‘due diligence’ checks by recruitment agencies on contractor umbrella companies are under consideration, there are a number of important and simple checks which prospective umbrella workers can make, both before and during their employment, to ensure their brolly is operating compliantly, writes Chris Mattingly of WTT Legal.

1. Is there a choice?

When agreeing to take the assignment, workers should be given a choice on which umbrella company they join.

Good reputable agencies will typically offer a preferred, or approved supplier list, so workers should always have some level of choice.

If the agency or recruitment consultant is stipulating one particular umbrella, it will most likely be due to commercial incentive they are receiving. This should be a red flag, so procced with caution.

2. Take steps to understand who your employer is

Before agreeing terms, the umbrella worker should take time to understand who their employer will be.

First and foremost, there should only be one contract to sign.

But then ask yourself a series of questions to truly grasp who your employer is going to be, and to determine if they look authentic, reputable, and compliant:

• Does the company name used on any paperwork align with the umbrella’s website?
• Does the umbrella carry a trade certification?
• Can the company be found on the Companies House website; and are there any red flags indicating the company or its directors have failed in their duties?

Finally, are there any adverse reviews when searching for the umbrella? The odd moan and groan is one thing, but if there are a number of negative reviews it may be time to choose another umbrella.

3. Onboarding documentation and checks

Before agreeing terms, the umbrella worker should receive as a minimum, a ‘Key Information Document’ from the agency and a ‘Pay Illustration’ from the umbrella.

In simple terms, these documents should clearly set out how and when the worker will be paid, with a full breakdown and estimate of their take-home pay.

These two documents should align and if there any discrepancies or confusion on how payroll will operate, you should raise this immediately with the umbrella.

Check the pay estimate with government tools and compare illustrations with other umbrellas. If the take-home pay appears too good to be true, it probably is.

4. Register for a HMRC ‘personal tax account’

As part of ongoing umbrella company ‘due diligence’ checks, contractors should ensure they have registered for a personal tax account on the HMRC website.

Once registered, you will be able to view your employer’s payroll submissions, so it’s important to check the employer’s name aligns with the employment contract and that the tax reported aligns with your payslip.

5. Check Payslips

Every pay day the worker should receive a payslip confirming the hours worked and how their net pay been calculated.

Payslips must show the contractor’s earnings before and after deductions; with year to date figures.

As a contractor, you should check that the following deductions have been made from your pay:

• Income Tax
• Employee National Insurance contributions
• Employee workplace pension contributions (if enrolled)
• Student loan repayments (if applicable)
• Other deductions that may have been agreed or are legally required to be paid

Importantly, the umbrella should only be making one payment.

If the worker receives two or more payments, this should be queried without delay, as this is a positive indicator for tax avoidance.

6. Be on guard for these eight payment descriptors

Payments described as any of the following could be another sign of tax avoidance:

1. Loan
2. Annuity
3. Bonus
4. Profit share
5. Fiduciary receipt
6. Credit facility
7. Capital payment  
8. Capital advance

7. Equip yourself with a tool

Finally, there are several government and industry tools that can be used to check payslips. SafeRec is a third-party provider of a payslip-checking tool called Payslip Buddy. Tools like these can be used to generate payslip audit reports and detect any fraudulent activity.

Remember, when using such a tool (or even without a tool), an umbrella company may be operating a tax avoidance scheme if:

• it makes a separate payment to the contractor which they tell the contractor is not taxable;
• more money than displayed in the payslip is paid into the contractor’s bank account;
• the contractor receives payment from a party other than the umbrella company which has not been taxed; and/or
• the contractor is asked to sign another agreement in addition to the contact of employment.

Lastly remember, due diligence isn’t ever just a single silver bullet

By following all of the steps above, contract workers will be putting themselves in a strong position to identify any signs of fraudulent activity and to minimise the impact which fraud and other non-compliant activity could have on them and their finances. Any suspected tax avoidance should be reported immediately here to HMRC.