Top 5 umbrella company 'due diligence' steps for contractor recruitment agencies to take

Following the government’s 2023 consultation into tackling non-compliance in the umbrella market, mandatory ‘due diligence’ checks for agencies working with umbrellas are being considered as part of the government’s ambitions to introduce regulation to the sector.  

In light of this, along with an ever-increasing landscape of new, non-compliant practices, these checks have become crucial for recruitment agencies who are incorporating umbrella companies into their temporary worker supply chain. 

To assist with this, we have identified the top five umbrella company ‘due diligence’ steps that recruitment agencies should take, in order for them to create confidence, and mitigate risk, in their temporary worker supply chains, writes Chris Mattingly, senior compliance specialist at WTT Legal.  

1. Look up the legitimacy of the umbrella company on Companies House

Before engaging the services of an umbrella company, recruitment agencies should start by checking its details and returns filed with Companies House.  

This step should be used to ensure that the financial position, location and trading history of the umbrella company are consistent with the information that has already been provided to the agency. 

This check should also give an insight into the credibility of the directors and “persons of significant control,” to help build an understanding of the history of the company as well as its associations with others. 

Watch out for minor differences in letters. A common approach is to change the name of the company by a single letter, to obfuscate secondary vehicles.

2. Check HMRC’s list of named tax avoidance schemes, promotors, enablers and suppliers

This list, published by HMRC, provides information about the tax avoidance schemes known to them, and the non-compliant ‘umbrella companies’ operating them.  

Recruitment agencies should check the list to ensure that any umbrella company they engage with is not included.  

Similarly, the names of the directors under that company may offer associated contacts which you can review against your own Preferred Supplier List.

If your agency identifies that an umbrella it engages with is added to the list, we recommend it is immediately excluded from the temporary worker supply chain. This is particularly important as any recruitment agency that engages with an umbrella company who operates a tax avoidance scheme can be considered to be an enabler of tax avoidance.

The corresponding enablers legislation carries considerable penalties and is imperative to mitigate against. If a recruitment agency becomes aware of a tax avoidance scheme that is not included in the published list, the scheme should be reported to HMRC.

3. Confirm VAT and PAYE references

The next step recruitment agencies should consider taking is to seek confirmation of VAT and PAYE references, as well as checking that payments made to HMRC are all up to date. 

HMRC has a direct tool for checking the legitimacy of a UK VAT number, which should act as a further verification of legitimacy of the company name, as detailed above.  

4. Scrutinise onboarding processes

Once recruitment agencies are satisfied with the legitimacy of the umbrella company, that they are not operating a tax avoidance scheme known to HMRC and have obtained confirmation of VAT and PAYE references, attention should turn to the onboarding processes implemented by the umbrella company.  

Important information that recruitment agencies should look to establish is the existence of transparency around how the worker will be engaged, who will be responsible for paying them and how they will be paid.  

Recruitment agencies should also seek confirmation of the processes in place to pay holiday pay, pension contributions, expenses and to comply with both the Conduct Regulations and the Working Time Regulations. Policies should be provided, reviewed and retained for record keeping of your agency’s ‘due diligence.’  

5. Worker pay check-up

Once an umbrella company is engaged, ongoing checks must be carried out by the agency to ensure that the workers are being paid correctly; that the umbrella is meeting the contractual rate and at least complying with the National Minimum Wage -- and that the correct amount of tax is being deducted. 

To check workers are receiving the correct pay, recruitment agencies should sample check workers’ pay slips. As well as checking that the amount paid is correct and that there are no unexplained deductions, recruitment agencies should look to establish that the party named as paying the worker on the payslip is the party they would expect it to be! 

The PAYE reference number should also be checked to ensure it aligns with the reference initially provided by the umbrella company. Third-party software (from providers such as SafeRec) exists to help recruitment agencies ensure that compliance is met here, in real-time. 

In the case of SafeRec, umbrellas can get certified and then, in return, have to account on a monthly basis for all payslips issued, with confirmation of amounts paid to HMRC, allowing the recruiter to help gain transparency in an automated fashion.  

Recruiter 'due diligence' on umbrella companies, final warning…

Failure to conduct reasonable ‘due diligence’ checks on umbrella companies -- and these top five are arguably the bare minimum to run -- can result in significant reputational, financial and legal implications for recruitment agencies. 

Therefore, it is vital for all recruitment agencies to conduct and retain detailed records of the above five steps as part of their due diligence, both before and during the engagement of any umbrella company.