The use of umbrella companies by locum social workers will face much greater scrutiny, especially from recruitment agencies, due to new legislation that comes into force at the end of September.
The provisions in the Criminal Finances Act 2017, which become law on 30 September, primarily target companies rather than workers, making “relevant bodies” criminally liable for failing to prevent third-party associates facilitating tax evasion.
Tax expert Carolyn Walsh, from CWC Solutions, told Community Care that, from 1 October, “everyone and his dog will be required to police the system for HMRC”.
She said that the law change would be “more a problem for the agencies”, rather than locums, if they had referred people to umbrella companies “without monitoring the way that they operate”.
“The locums who have gone with shady umbrellas will be landed with tax demands and penalties,” she said, “but the agencies which carry on paying those umbrellas knowing they operate something other than straightforward PAYE schemes are liable under the new piece of legislation which carries hefty fines.”
Agencies say that HMRC’s increasing involvement in their industry means locums must not be complacent about their tax affairs. They claim locums risk investigations and financial penalties if they stay with ‘too good to be true’ umbrella schemes.
Tightening the rules
Following the tightening in April of so-called ‘IR35’ rules, most locum social workers have been prevented from operating via tax-minimising limited companies. Since then, umbrella companies, which act as de facto employers and process locums’ earnings, have been aggressively marketing their services. Some offer rates of take-home pay up to 90%.
Recruiters have previously reported umbrellas offering kickbacks to consultants in exchange for steering workers their way. Some locums have similarly complained about agencies pointing them in the direction of firms offering to tax them at suspiciously low levels.
‘Massive pay cuts’
Due to the imminent introduction of the new law, Facebook discussion groups used by locums have recently seen posts from social workers who have suddenly been told by their agencies to switch umbrellas, or run the risk of legal action from HMRC. As was the case after the IR35 changes in April, some workers are reporting that they face “massive” pay cuts.
Gary Chatfield, managing director of the HCL agency, described the new regime as a “nail in the coffin” for umbrella companies that avoid paying tax and said that firms like his were now “essentially doing the work of HMRC”.
“The onus is on my organisation to do enough due diligence that we are satisfied, that HMRC would be satisfied, that the correct amount of tax will be paid,” he said. It was no longer sufficient for locums simply to state in writing that they were not operating via any tax avoidance schemes, he said; agencies would in many cases have to see pay slips to back such statements up.
Chatfield added that HCL was also having to audit all smaller agencies it works with as a ‘managed vendor’ for local authorities, to ensure that they are not allowing locum social workers to use non-compliant umbrella companies. But, he said, some firms with hundreds of locums on their books were so far failing to provide the necessary assurances.
Risks to locums
Earlier this year, agencies and professional bodies voiced concerns about the dangers to locum social workers of staying with non-compliant umbrella companies. In 2016, a Community Care investigation revealed that some locums caught up in an earlier tax scam had been hit with retrospective bills of up to £45,000 by HMRC.
Sarah Kay, director of recruitment at the Taylor Davenport agency, said she was seeing far more social workers turning away from umbrella companies, especially dubious ones, in recent months. But she said she was still occasionally having to turn locums away because they wished to work via firms that were clearly not legitimate.
“Those firms will all have a client list,” she said, adding that HMRC already appeared to have shown interest in some umbrella schemes and would not find it difficult to establish who had been working through them.
Chatfield said that with the new legislation coming in, and agencies in far closer contact with HMRC than they had been previously, locum social workers still using “dodgy” umbrella companies faced a number of risks.
“The evidence we are seeing is that HMRC are becoming far more involved in the recruitment business as a whole – we are having regular contact where perhaps we wouldn’t have in the past, sending real-time information and working with them to make sure everything is correct,” he said. “I have been to meetings where they have been very forthright about their views on umbrella companies, where previously they would have sat on the fence.”
But Chatfield added that there was also a danger of non-compliant umbrella companies simply folding once they start being more aggressively policed, potentially leaving locums in the lurch.
“Locums could be left with [not only] a large tax bill, but pay that they can’t retrieve,” he said. “That’s a real concern.”