When temporary workers or recruitment agencies select a payroll provider, it is essential that they do everything they can to ensure the provider is fully compliant with employment law, pays taxes as it should, and acts ethically. However, as the outsourced payroll sector remains unregulated, a pocket of umbrella companies to act unscrupulously, an issue that the PCA is working to resolve.

Fraudulent activity can be difficult to spot. This article explores three ways in which recruiters and workers can identify a fraudulent umbrella company to avoid being taken advantage of.

1.     Research the company details  

There may be clues in the umbrella company's history and publicly available information. Unusual company names can be an indication that a payroll provider is engaging in tax avoidance schemes, especially if there are multiple organisations with very similar names.

Companies House, which maintains the public register of companies in the UK, should always be checked before signing with a new provider. If the company has only been operating for a short period of time, this may indicate a potential risk. Many unscrupulous umbrella companies only operate for a short time, usually six to eighteen months, before closing their books and taking the profits. Selecting a provider that has been operating for longer is generally safer although, of course, this is not guaranteed. If the organisation's directors also seem to have had multiple failed ownerships or start new companies frequently, this may be another red flag.

A significant indicator is if a company's details or activities listed on Companies House differ from what is advertised by the organisation. Recruiters and workers should steer clear of providers whose activities do not align. Organisations that are registered overseas should also be avoided, as they may not be following UK tax legislation, thus posing a risk that the correct taxes are not being paid, which may lead to a bill from HMRC down the line.

Once engaged as the payroll provider, fraudulent operators often move workers between different companies, so this may be a sign of illegitimate activity.

2.     Check the paperwork

The official documents used by an umbrella company are a good indicator of whether it is acting compliantly. If a worker is being asked to sign multiple documents, or if the paperwork does not line up with what has been discussed, recruiters and workers should be aware that there may be illegal activity at play. Official paperwork such as payslips need to be carefully scrutinised.

Before engaging an umbrella company, workers and recruiters should request an example payslip to see that all legally required information is included. A payslip that lacks clearly displayed NIC and tax deductions, has additional or anomalous fees listed, or includes an indication that the company is 'HMRC approved' should be avoided. HMRC does not approve any companies. If the company claims to be accredited, this should also be checked with the accreditor in question to ensure they are not making an erroneous claim. Carrying out a review of the accreditor's credentials and is also recommendable to make sure there is no history of accrediting fraudulent companies.

Similarly, once the arrangement is in place and a worker begins to receive their payslips, they should remain alert and keep checking them, using their Key Information Document (KID) as a reference point for what fees and deductions should be applied. If the take-home pay seems high or the tax calculations do not match what the worker believes they owe, they should enquire or seek advice from an expert.

3.     Consult HMRC's list of known schemes  

Thousands of people are reliant on the services provided by umbrella companies and so establishing trust is essential. For this reason, revealing umbrella companies that act outside the law or in an unethical way is vital to ensure honesty and compliance within the outsourced payroll sector.

HMRC's list of named tax avoidance schemes, promoters, enablers, and suppliers is another helpful resource for temporary workers and recruiters to check to help identify which payroll providers to trust and which to avoid.

However, this 'blacklist' is not complete and does not show all umbrella companies that may be acting wrongfully. Many schemes fall under the radar, and of those identified by HMRC, most companies are removed from the list after 12 months to comply with legislation, whilst others are kept off whilst appeal processes are followed.

If unsure, seek advice

Unfortunately, establishing whether a payroll provider is compliant can be . Carrying out thorough due diligence may not be enough and it is important to seek support when needed. Even once a provider has been engaged, remaining vigilant and re-checking HMRC's list for its frequent updates is also recommended.

Going forward, the PCA intends to set up a whistleblowing scheme so that those involved in the sector can feel safe in calling out unscrupulous activity. Until then, if at any time a worker or recruiter is concerned that their payroll provider is acting illegitimately but they are not sure what to look out for, they should seek support from HMRC, the provider's accrediting organisation (if the umbrella company is accredited), or a trusted accountant.