Paul Newsham - CEO of Payroll Compliance Authority (PCA) and Chartered Accountant with more than 30 years of experience.

MYTH: All umbrella firms can be trusted to manage payroll in compliance with tax and employment regulations

There are hundreds of umbrella companies operating across the UK providing outsourced payroll services for a broad range of businesses. The majority of these companies are honest, legitimate and comply with UK tax and employment laws. However, there are a minority of unscrupulous players that cannot be trusted.

Anecdotal evidence suggests that there are between 600,000 and 800,000 UK workers across multiple sectors who are currently paid by umbrella companies and that less than a third of these companies are administered by payroll providers that have been properly audited by accrediting organisations, such as the PCA. This makes it difficult to identify which umbrella companies can and cannot be trusted.

MYTH: There are simple steps you can take to be certain that your umbrella company is acting honestly

Being certain of an umbrella company's compliance is in fact extremely difficult. Fraudulent schemes are often set up in a sophisticated way with an outward appearance of legitimacy, making them hard to detect.

Recruitment firms engaging third-party payroll suppliers need to carry out extensive due diligence into new suppliers, and remain vigilant of existing suppliers, but even these firms cannot always identify where fraudulent activity is taking place.

I would recommend that workers themselves also carry out due diligence on the company that is paying them, and that they check every payslip to make sure the figures and details are accurate and consistent with what they were expecting. A higher-than-anticipated salary can be a red flag, for example.

A few steps to check the legitimacy of an umbrella company include:

1.     Researching the company details on Companies House and checking that the details listed tally with what the company says on their website and paperwork. Checking up on the individuals that run the company can also bring up red flags if the information is suspicious in any way.

2.     Check the umbrella company's paperwork, including payslips, to make sure all the correct and expected details are included, including clearly displayed NIC and tax deductions.

3.     Check HMRC's list of named tax avoidance schemes, promoters, enablers, and suppliers to make sure your payroll provider is not one to avoid. The list is updated regularly.

We have written more about ways to identify a fraudulent umbrella company here.

A final piece of advice would be to look into any claims of accreditation made by the umbrella company, to make sure that they have in fact been audited by the organisation named and that the accreditor is reputable.

The PCA is independent and the only not-for-profit accreditor in the field. We offer law-abiding payroll companies the opportunity to show they are an honest and trusted business by undertaking a rigorous audit process, carried out independently by a top accounting firm. 

MYTH: If a contractor receives an unpaid tax bill from HMRC, it is their umbrella company that will pay it

Unfortunately, in the majority of cases, unpaid taxes will need to be paid by the contractor who owes them, even if they were not aware that incorrect tax payments had been made.

Unscrupulous umbrella companies find many ways to take advantage of workers, such as through incorrect tax deductions, pay skimming, and reduced payments to HMRC including PAYE, National Insurance and VAT. By the time the worker has received a bill from HMRC, the umbrella company will likely have closed down. This is particularly how 'mini' umbrella company fraud is carried out, and there is some useful information on this here.

This considerable financial risk to workers is why the PCA has been calling for regulation of the sector and, in the meantime, is working to protect workers and recruitment companies from serious financial and reputational harm through a rigorous audit process and repeat annual audit checks of umbrella members.