HMRC clarifies the umbrella company process

HMRC recently provided temporary workers with further guidance on agencies and umbrella companies. There are two reasons for this, one is to clarify the requirement to provide agency workers with clearer information about the pay rate they will be paid, when paid by an umbrella company, before they agree to be paid by the umbrella company.

The other is to negate the idea that umbrella companies ‘deduct the employer NI from the worker’s pay rate’ because this is being used by people who are promoting tax avoidance scheme providers to agency workers, which fail to deduct any NI by artificially reducing a worker's employment income to below statutory thresholds.

HMRC provides specific guidance on two documents - the first being the Key Information Document, a legal requirement since April 2020, and the Reconciliation statement which has become a standard procedure used by many umbrella companies. Both documents are designed to reduce pay rate misrepresentation and will identify a tax avoidance scheme provider.

https://www.gov.uk/guidance/working-through-an-umbrella-company?

In practise, the two documents have tended to morph into the same document and while that wasn’t and still isn’t the intention of the new regulation, does it matter? 

HMRC's guidance explains the process of hirer paying an agency, the agency paying an umbrella company and the umbrella company paying the worker, and the information contained in the KID/reconciliation statement, actually does provide this too. 

Whether this morphed document satisfies the new regulations is anyone’s guess at the moment, but as long as promoters of tax avoidance schemes can’t continue to use a misconception over the way umbrella companies process payments, and unscrupulous agencies/hirers can’t misinform workers with statement like “being paid by an umbrella companies lets you retain your contractor rate” then this dual purpose document will suffice, for now at least.