HMRC’s umbrella director indemnity tip to agencies falls a bit flat

Despite being ‘with good reason,’ the Revenue’s recommendation that brolly bosses ‘put their house on the line’ isn’t being widely signed off.

An HMRC recommendation that agencies make umbrella directors indemnify them against tax liabilities if PAYE doesn’t get levied on contractor pay isn’t being widely signed off.

A lawyer told ITContracting.com that a “few” of his umbrella company clients had agreed to put such indemnities in their contracts.

The lawyer said the indemnity clauses were between the agencies and umbrella companies, but he gave no names on either side.

‘Not happy to put my house on the line’

The owner of an umbrella company, who similarly declined to be named, says that personally, they would “not be happy to put my house on the line.”

The owner said of their decision to ITContracting.com: “Yes, I’ve seen those clauses, and no we don’t sign them.

“The liabilities don’t usually just stem from [or relate to] unpaid taxes; but much more.”

‘HMRC’s recommendation to agencies is with good reason’

Lawspeed, a legal services firm, says it’s not surprising umbrella directors don’t “welcome a request for a personal guarantee”.

“But HMRC’s recommendation is with good reason,” says Lawspeed director Theresa Mimnagh.

‘Agency could be left high and dry’

Referring to the recommendation by the Revenue, at 2 minutes and 2 seconds of this HMRC video, Mimnagh told ITContracting.com:

“A contract between an agency and an umbrella will commonly include an indemnity from the umbrella for non-compliance or tax liability.

“However, an indemnity can only protect an agency, if it can be enforced.

“And if an umbrella has minimal or no assets, whether generally or because of a group structure, the agency relying solely on recovery from the umbrella, could be left high and dry.”

‘Umbrella director indemnity clause is an unrealistic expectation’

Crawford Temple of compliance organisation Professional Passport, yesterday said he has not heard of a single umbrella company agreeing to the indemnity clause which the Revenue recommends.

“HMRC’s recommendation that agencies should get an umbrella director to indemnify them should a tax underpayment emerge…is an unrealistic expectation.”

‘Hold umbrella providers to account’

Professional Passport’s CEO, Mr Temple continued to IT.Contracting.com: “No agency [in our 17-year history] has suffered any loss from debt-transfer, working with providers we’ve accredited.

“We also have a good working relationship with a number of agencies who share data with us which allows us to hold…umbrella providers to account.

“And to reiterate, no agency has suffered as a result of HMRC debt transfer.”

‘Indemnity clause has been an option for many years for our agency-clients’

Operating since 1997, Lawspeed disagrees, insofar as an umbrella director’s guarantee has been included in its contracts for agencies “as an option…for many years.”

Yet a brolly known for being vocal about compliance, Clarity Umbrella, says opting to work with an umbrella which has been accredited by a verifiable body nullifies the need for an indemnity.

‘HMRC-rubber stamped indemnity clauses’

Managing director Lucy Smith told ITContracting.com:

“Such companies, which undergo a thorough audit process, at significant cost, get regularly assessed for evidence showing that payments are being processed properly. And not just once a year as some think!

“So using an accredited company should remove this risk, and lead to no requirement for these HMRC-rubber stamped indemnity clauses.

“Also, if the agency is performing regular due diligence checks on the umbrella, then again there should never be a requirement to use such a clause for taxes.”

‘Compliance steps’

Professional Passport echoed, saying “extensive review” and “daily checks” — hallmarks of a thorough umbrella accreditation process, should combine with agencies’ own checks to provide safeguard enough.

In the HMRC video, HMRC recommends to recruitment agencies in a section entitled “Compliance Steps”: “Directors of umbrella companies…[should] indemnify you against tax liabilities if PAYE hasn’t been carried out correctly on a contractors’ total taxable pay.”