Recruiters urged to protect against umbrella failures
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Recruitment agencies have been urged to protect against the failure of umbrella firms, according to recruitment law specialist Lawspeed.
Following reports that that JSA Services, part of the JSA Group, owes £10.6m to HMRC and has entered into a voluntary arrangement and that two other “umbrella service providers” have left contractors unpaid, Adrian Marlowe, managing director of Lawspeed and chair of recruitment trade body, the Association of Recruitment Consultancies (ARC), says the umbrella industry is not regulated, with few checks and balances in place.
Lawspeed warns that while all umbrellas claim to comply, the issue of incorrect payment of expenses in particular is a current focus of concern for HMRC. “Where an HMRC investigation establishes that rules have been incorrectly applied by umbrellas, a demand for payment of correct levels of tax usually quickly follows.
“That can lead to an insolvency situation and the potential for the umbrella to simply fold. In those circumstances it is entirely possible that monies received in from agencies can be used to pay off secured creditors and HMRC before the worker gets a dime – leaving the agency to face the brunt of the worker’s complaints, and everyone in the chain unhappy.”
Marlowe says: “While agencies have quite rightly been focused on making sure they are not exposed to debt transfer arising under the Managed Services Legislation, it is just as, if not more, important for agencies to make sure that have a fall back position if the umbrella they are dealing with fails to pay the worker. Claims of compliance by an umbrella should not lull the agency into a sense of security – as recent events have shown that sense can be false.
“Given HMRC’s current policy of investigation it is crucial that agencies ensure they have correct procedures and contracts in place. Agencies should never rely on third-party accreditation or the size of an organisation. Regrettably these recent events have served as a siren warning for all, and without doubt have again damaged the reputation of the umbrella industry.”
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Readers' comments (5)
Tim Loftus | Tue, 9 Feb 2010 8:48 am
And you are suprised by this? See http://www.prisma-recruitment.com/umbrellas.asp. We have only been saying this for the last three years!
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RACS Group | Tue, 9 Feb 2010 11:59 pm
I totally agree with Adrian Marlowe. That's why RACS Group has been offering a comprehensive three-point plan to protect agencies against financial pitfalls and potential debt transfer. Please read our free February newsletter at www.racsgroup.com (blog section) or email info@racsgroup.com and request a copy.
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Matthew Parsons | Wed, 10 Feb 2010 9:14 am
This article highlights the importance of choosing the right Umbrella. There are Umbrella companies out there that are regulated by statutory bodies (rather than self regulated or unregulated) and that also have agency funds ring fenced. When you are choosing your Umbrella (either as a recruiter or a contractor), just ask them whether the above applies to them. FPS Group is a great example of a UK Umbrella that meets both of these criteria.
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Phillip Venn | Tue, 16 Feb 2010 6:17 pm
Having spent the last 9 years funding transactions in the recruitment sector, before moving into the umbrella/payroll/outsourcing market, I have made the following observation.
Lenders are becoming particularly uncomfortable with a scenario that is occuring more frequently than ever, whereby a timesheet is being funded more than once (and in some cases 3 times):
1. Master Vendor invoice to client
2. Agency invoice to Master Vendor
3. Umbrella Company invoice to Agency
The facilities used to do this are factoring or invoice discounting facilities.
A well-run, traditional payroll company should not require debt finance, as it is generally remitting and receiving funds simultaneously. In addition to their margin, a payroll company will also be sitting on a month or a quarter's PAYE and VAT held in their bank account.
A tip to reduce (ie not totally mitigate) the risk to an agency would be to run a credit report on the umbrella companies with which you transact. If the company has a charge over book debts reported or a debenture by a bank or finance house, then the umbrella is most likely relying upon invoice finance to offer terms to agencies or to fund elaborate technical systems using money that they have not yet earned.
There are so many providers in the UK market that it would seem careless to risk using a company reliant upon funding that should be cash positive.
Phillip Venn
Sales Director
Liquid Friday Ltd
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simon | Wed, 17 Feb 2010 9:04 pm
There is only one way to be safe and that's work as a Ltd company with you in charge of your own bank accounts - no directors, just you in charge of your own company and picking an accountant to walk you through it and take care of what you need
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