New Umbrella Company Legislation Explained

Understanding the Recent Changes to Umbrella Company Legislation

The release of the draft legislation has confirmed several anticipated changes affecting umbrella companies, agencies, and end clients. These amendments impact risk management, responsibility for Pay As You Earn (PAYE) deductions, and how supply chains must confirm worker status.

Key Points of Joint and Several Liability

• Confirmed joint and several liability: The umbrella company and the agency closest to the end client are now both responsible for the correct application and payment of PAYE. If no agency is in the chain, liability rests with the umbrella and the end client.
• This means that HMRC can recover shortfalls from either party, not just from the immediate employer, if any errors occur.
• Joint and several liability is not the same as debt transfer. Under the new rules, liability does not cascade up the supply chain. Instead, it is shared only between designated parties.
• If common ownership is found between provider and agency, the end client also becomes jointly liable. This aims to address the risk of single entities controlling multiple points in the supply chain.

Agency and End Client Responsibilities

• Agencies must inform their clients about these new obligations. End clients should recognize that their choice of umbrella arrangements can affect their own risk exposure.
• Due diligence remains critical. However, even thorough checks do not exempt parties from liability for unpaid debts. Demonstrating compliance is nonetheless essential for broader supply chain standards.

HMRC's Enhanced Powers

• The legislation gives HMRC authority to classify arrangements as umbrellas regardless of how they are labelled. Unconventional models like mini umbrellas, false self-employment, or disguised payment mechanisms can be treated as umbrella arrangements if the features match the standard model.
• This prevents avoidance through creative interpretation or relabeling.

Focus on SDC and Self-Employment Disclosure

• A significant change involves the application of Section 44, especially where engagement status is not transparently disclosed. SDC (Supervision, Direction, or Control) assessments are critical.
• Agencies often ask their providers to undertake SDC reviews, sometimes backed by insurance. Many insurance policies limit coverage to situations where processes were followed precisely, which means genuine claims are rare.
• The updated legislation reiterates that agencies retain liability for PAYE unless the end client has performed and confirmed the SDC status. Third-party SDC assessments are considered invalid if not disclosed to the end client.

The Introduction of 'Purported Umbrella Company'

• The concept of a 'purported umbrella' allows for PAYE liabilities to be triggered if engagement arrangements suggest an umbrella model, even where formally registered as self-employed or otherwise.
• If end clients are unaware of self-employed status, liability may default to the umbrella or pass to the agency or client, as appropriate.

Practical Takeaways for Supply Chains

Review the following considerations:

1. Insurance policies rarely cover these new scenarios.

2. Agencies must obtain documentary proof on worker engagement, with confirmation to notify the end client.

3. End clients should demand written confirmation regarding worker status from agencies.

4. Direct client involvement is necessary for SDC assessments and status confirmation.

5. Umbrella companies using the CIS self-employed model should separate these from umbrella operations to reduce confusion and risk.

6. Changing structure may impact compliance with the Construction Industry Training Board Levy (CITB).

This legislation affects all providers, agencies, and end clients operating in the CIS sector and reinforces the need for transparency and clear documentation.

Insights and Commentary

"There is no excuse to avoid these debts regardless of the due diligence carried out."

"End clients must always have accurate documentary confirmation from their agency as to how workers are being engaged, particularly when being engaged as self-employed."

Industry guidance emphasizes that compliance and clear, documented communication throughout the supply chain offer the best defense against increased HMRC scrutiny. All stakeholders are urged to review their current practices considering these changes.

Steps Forward

• Agencies should immediately review all supply chain records for transparency and accuracy.
• Providers must clarify the structure and engagement terms of any CIS operations.
• End clients are advised to demand ongoing written confirmation about worker status and engagement practices.
• All parties should stay abreast of additional HMRC guidance as it is released.

Understanding and adapting to these regulatory changes is essential for continued compliance in the evolving employment landscape.