Is it still safe to recommend an umbrella company?

Following the collapse of several umbrella companies during the downturn, many recruitment agents are questioning the security of their preferred accountancy service providers.

Many umbrella companies folded due to tax compliance failures. They either miscalculated the PAYE and National Insurance liabilities owed, or used contractors' pay to fund their own operating costs.

In most cases, contractors lost out and recruitment agencies were left to bear the brunt of these individuals' complaints. It's therefore hardly surprising that many agents are now reluctant to recommend an umbrella company to their contractors in case the firm folds and the agency is held liable for lost pay.

However, not recommending an umbrella company could have more serious consequences.

When left to source their own method of remuneration, contractors often end up choosing a Managed Services Company (MSC).

Under MSC legislation in the UK, where the PAYE and National Insurance contribution debts of an MSC cannot be recovered from the company, HMRC may transfer the debt to a third party, such as the contractor's recruitment agent.

In order to avoid this from happening, it is safer for agents to recommend a compliant, PAYE umbrella company. Because these firms are PAYE employment based, they are exempt from the 2007 MSC legislation, which means there can be no transfer of debt liability and therefore no financial risk to agents.

Industry experts also advise agents to choose umbrella companies that subject themselves to regular independent audits.

"My company is independently audited to ensure both financial performance and compliance," says Jonathan Hughes, managing director of leading umbrella firm Atlantic Umbrella.

"In addition, we belong to a non-profit trade body, the A-EMC, which only accepts members that can demonstrate that all tax and contractor liabilities are paid when due.

"In fact, Atlantic Umbrella operates independent contractor funds bank accounts which are separate from the company's personal bank account. This allows us to easily reconcile the funds against contractor and HMRC liabilities - and ensures that we never touch contractor funds when we are financing our own operations," he adds.

In order to minimise their financial risk, agents should recommend an umbrella company to their contractors based on the following criteria:

1. Is the umbrella company a PAYE employment based organisation?

2. Is the firm independently audited to evaluate both financial performance and compliance?

3. Does the umbrella company pay all tax and contractor liabilities when they are due?

If agents can answer "Yes" to all of these questions, they face no financial risk at all by recommending the firm to their contractors. In fact, they'll be ensuring themselves more peace of mind.