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Recruiters – What if Your Umbrella Company Uses a Tax Avoidance Scheme

Where tax compliance is concerned, “don’t ask, don’t tell” is not a safe policy for recruiters to adopt, because recruitment agencies can be held responsible for non-compliance their supply chains.  We’ve written in the past about the dangers of tax avoidance for you and your contractors, but what should you do if you discover your current umbrella partner is using a tax avoidance scheme?  

Check the facts

Involvement with tax avoidance is such a risk, both in legal and financial terms, and in terms of potential bad press, it can be tempting to act right away before you have all the facts. While it can be important to act swiftly, it’s usually better to fully understand the situation before responding. We’d usually advise that you investigate any allegations before ending what could be an important business relationship. Don’t be afraid to seek independent advice if you’re not satisfied.

Disengage as soon as possible

Given the logistics of getting your contractors paid and how disruptive it could be, it’s often not possible to simply drop an umbrella company overnight. If you have alternatives available on your PSL, we would advise you to divert new referrals away from the non-compliant umbrella, and begin the process of switching anyone who’s already with them.

If your contractors have been using a tax avoidance scheme, the switch to a complaint umbrella may reduce their take-home pay, but it genuinely is the best thing for everyone in the long term.

Explain clearly to your contractors

There is obviously potential for this to be an unpopular decision among your contractors, so it’s important to be entirely open about what’s happening and why. The compliant umbrella company you’re moving them to will be used to explaining the importance of compliance, so they might be able to do a lot of the heaving lifting – but it’s important that your contractors understand that you’ve made this decision and it’s entirely in their best interests.

Speak to a tax expert

Depending on the details of the tax avoidance scheme, how many of your contractors made use of it and for how long, a considerable amount of tax could have been underpaid. We advise contacting a reputable, independent tax expert for advice on your specific situation and any action you or your contractors will need to take.

Tighten up your vetting procedure

It will be helpful to understand how your recruitment agency found itself working with a non-compliant umbrella company, so you can make it less likely to happen in future. We suggest you look at your current vetting process and how this one got through. How you respond will depend on what happened, but it could include changing your process, additional training for key staff, or a combination of both.

The Government’s consultation on regulation of umbrella companies includes a suggestion that would see recruitment agencies being made responsible for unpaid tax resulting from non-compliant umbrella companies, which would heighten the risk for recruiters and make this issue even more important.

If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email

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