How recruitment agency PSLs are helping to regulate umbrella market

Preferred Supplier Lists (PSLs) are helping recruitment agencies and the umbrella market to self-regulate their relationship, while complying with HMRC rules and taxation laws.

The issue of regulating the umbrella market was raised in Parliament in proposed amendments to the Finance Bill, including one that would see umbrella companies shut down completely.

At present, the relationship falls under section 61O of the Income Tax (Earnings and Pensions) Act 2003, commonly called ITEPA 2003.

Under the proposed amendments to the Finance Bill, the Chancellor of the Exchequer would have been required to review the impact of section 21 of the Finance Act on tax avoidance, including if umbrella companies were prohibited from operating or subject to certain restrictions.

These restrictions would include:

· The worker must have no material interest in the umbrella company.

· The umbrella company must process 100% of agency payments as earnings, including the total cost of employment, minus their intermediary fee.

The amendments were not carried forwards, but highlight the government's interest in potential tax avoidance schemes by umbrella companies operating in the recruitment market.

In the spotlight

Attempts to reduce the amount of tax paid by workers operating via recruitment agencies under umbrella companies have been on HMRC's agenda for several years already.

In August 2018, HMRC Spotlight 45 warned against schemes that say a payment "is non-taxable because it does not count as income as it's a loan, credit, or something similar".

"These payments are actually no different to normal income, and tax and NI contributions are payable," HMRC added.

HMRC advised workers to check the legitimacy of schemes where:

· You are told you can keep 80% or more of your earnings after tax.

· Only a small amount of your salary is paid to you via payroll and PAYE.

· Much of your income is paid to you as a loan or credit.

· Your payment arrives via a third-party or from overseas.

Significantly, HMRC warned that if you are paid via such schemes, you may be personally liable at a later date to repay any tax, NI, interest and penalties.

How PSLs help

PSLs, or Preferred Supplier Lists, allow recruitment agencies to shortlist only legitimate umbrella companies who they know they can trust.

Creating a PSL means conducting thorough due diligence to check that every umbrella firm on the list is fully HMRC compliant, as well as adding value to their candidates and to the recruitment agency's business.

This means the agency and candidates are protected, and can have additional benefits, such as the ability to refer novice candidates to an umbrella company that can provide them with the support they need to advance their careers.

Finally, a PSL protects the agency itself, which can be deemed an intermediary under the Onshore Employment Intermediaries legislation, and targeted by HMRC for the recovery of any unpaid tax.

In the absence of formal regulation, recruitment agencies must act responsibly in their own interests and in the best interests of their candidates - and through collaboration with legitimate umbrella companies on a PSL, the sector as a whole is able to do exactly that.

If you are interested in discussing any of our services please get in touch here and we will be happy to help.