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In recruitment in recent years, umbrella companies play a big role in handling payroll for temporary and contract workers. They take care of things like tax deductions and ensure everyone’s following employment laws. But, it is important to understand that not all of these companies follow the rules. Some are involved in tax avoidance schemes that can put both contractors and recruitment agencies at serious risk.

To combat this, HMRC publishes a blacklist of companies involved in these dodgy schemes. While it’s a helpful tool, the list itself isn’t perfect. Many schemes slip through the cracks, and entries are often removed after just 12 months. So, while checking the blacklist is a good first step, recruitment agencies and contractors still need to do their own homework to avoid getting caught out​. We are here to provide some clarification through this article.

What is HMRC’s Blacklist?

The HMRC blacklist, officially called the "Tax Avoidance Schemes – Current List of Named Schemes, Promoters, Enablers, and Suppliers," is designed to warn businesses and individuals about potential tax risks. It identifies umbrella companies and payroll service providers involved in promoting or enabling tax avoidance schemes, such as underpaying PAYE (Pay As You Earn) taxes or misrepresenting take-home pay figures.

As of March 2024, the blacklist included 72 entries, with seven new schemes recently added. However, it’s important to note that this list is not comprehensive. Many tax avoidance schemes go undetected or unreported, and some are sophisticated enough to slip under the radar, even for experienced professionals in the recruitment industry.

How the Blacklist Works

HMRC updates the blacklist as new schemes are identified and evidence of non-compliance is gathered. The list is arranged alphabetically, and entries are typically removed after 12 months due to legislative limitations, regardless of whether the scheme is still operational. This can be problematic, as some schemes may continue to target contractors and businesses even after being removed from the list.

In some cases, HMRC cannot disclose all the details about a scheme due to ongoing legal action or appeals. Still, they encourage individuals who have engaged with any of the listed schemes—or who notice similar tactics in other companies—to report them. This helps HMRC update the list and monitor additional non-compliant operators.

Why Recruitment Agencies Should Be Concerned

For recruitment agencies, partnering with a non-compliant umbrella company can have severe repercussions. If HMRC discovers that a contractor's taxes have not been handled correctly, the agency that placed the contractor could be held liable for any unpaid tax or National Insurance contributions. This could lead to unexpected financial penalties, legal challenges, and damage to the agency’s reputation.

To avoid these issues, recruitment agencies are encouraged to perform thorough checks when selecting umbrella companies. Simply consulting the blacklist is not enough. Agencies should investigate how payroll is managed, ask for references, and work with companies that are transparent about their tax practices. A compliant umbrella company will always provide clear explanations of tax deductions and operate within legal boundaries.
Additionally, it’s wise for agencies to include indemnity clauses in their contracts with umbrella companies. This allows the agency to seek compensation if the umbrella company fails to meet its tax obligations, shielding the agency from potential financial loss.

Protecting Contractors from Tax Avoidance Schemes

Contractors, particularly those new to umbrella companies, can easily be lured into tax avoidance schemes without realising it. Some non-compliant umbrella companies promise higher take-home pay by using aggressive tax strategies. They might suggest ways to reduce tax payments through questionable expense claims or complex payment structures, which can result in underpayment of taxes.

If HMRC determines that a contractor has participated in a tax avoidance scheme, they can be held responsible for repaying the missing tax, and in extreme cases, they may face penalties. This can be a devastating financial burden for many contractors.

To protect themselves, contractors should thoroughly research any umbrella company they consider working with. Checking the HMRC blacklist is a good first step, but contractors should also seek clarity on how their pay is calculated, ensuring all tax deductions are made at the source.

In some cases, seeking professional advice from an accountant specialising in contractor tax issues can offer additional peace of mind. An expert can help contractors understand their tax obligations and confirm whether the umbrella company they are working with is fully compliant.

The Government’s Role in Tackling Non-Compliance

The UK government is aware of the growing issues in the umbrella company market and has taken steps to address the problem. In April 2024, the government announced a package of tax policy proposals designed to make the system fairer and reduce non-compliance. One of the key measures under consideration is a legal requirement for businesses that use umbrella companies to conduct proper due diligence.

This due diligence requirement would mean recruitment agencies and other companies that engage umbrella firms must thoroughly vet those firms. This could involve audits, reviews of payroll practices, and ensuring tax obligations are met. Businesses failing to meet these requirements could face penalties or legal action if their payroll partners are found to be non-compliant.

Additionally, HMRC is working on new guidance and tools to help businesses and workers ensure compliance. One tool expected later this year is an online pay checking system, designed to allow contractors to verify that the correct tax deductions are being made. This would provide an extra layer of protection for workers and increase transparency in the payroll process.

The Future of the Umbrella Company Market

While HMRC’s blacklist is an essential resource, it’s clear that further action is needed to regulate the umbrella company market. Some industry experts have suggested that HMRC could go beyond the blacklist by introducing an approved list of compliant umbrella companies. This would give agencies and contractors a greater degree of confidence, reducing the burden of performing exhaustive due diligence on every payroll provider.

Until such a list is introduced, recruitment agencies and contractors must remain vigilant. The umbrella company market can be risky for those unaware of the potential pitfalls. Regularly consulting the HMRC blacklist, asking the right questions, and seeking independent advice are crucial steps to avoid getting caught up in tax avoidance schemes.

How to Stay Compliant and Safe

The use of umbrella companies is a valuable tool for managing payroll in the recruitment industry, but it comes with risks. HMRC’s blacklist offers an insight into companies and schemes that should be avoided, but it doesn’t tell the whole story.

Advice for Contractors

For contractors, it’s important to be cautious when selecting an umbrella company. Begin by checking the HMRC blacklist, but don't rely on it alone. Always ask for clear explanations on how your pay is calculated, ensuring that tax deductions are made correctly. Be wary of any company that promises unusually high take-home pay, as this could indicate involvement in a tax avoidance scheme. Seeking advice from a tax professional can further safeguard you, helping you understand your responsibilities and avoid unexpected tax bills or penalties. Staying informed is essential for protecting your financial well-being.

Key takeaways

Recruitment agencies and contractors must go beyond the list, carrying out their own research, implementing strict compliance measures, and staying up to date with legal requirements.

By taking these steps, agencies can protect their businesses from the serious financial and legal consequences of non-compliance. Contractors, too, can ensure that they remain on the right side of the law, avoiding any unexpected tax bills or penalties.

Staying compliant might take extra effort, but in the long run, it’s essential for safeguarding your business and financial health.