IR35 | Legislation

IR35: what to look out for when working with umbrella companies

With the upcoming changes to IR35 legislation, some of your contractors (currently working under a PSC) may decide to move to umbrella employment.


With the upcoming changes to IR35 legislation, some of your contractors (currently working under a PSC) may decide to move to umbrella employment.

With the upcoming changes to IR35 legislation, some of your contractors (currently working through a Personal Service Company (PSC)) may fall within the scope of IR35. Instead of employing these contractors directly you may wish to engage with an umbrella company who will manage the employment relationship on your behalf.

There are a lot of umbrella companies to choose from and it’s important to choose the right one that will reflect well on your business and look after your contractors. So how can you be sure you’ve made the right choice?

Carry out due diligence

Appropriate due diligence should be carried out on all umbrella companies. Consider the following:

  • Who are the owners, directors, shareholders?
  • Is the umbrella UK owned and registered with no offshore affiliations?
  • Make sure that the umbrella company does not make use of any sort of offshore tax avoidance schemes.
  • Confirm that all payments made to employees are through PAYE. The umbrella should be able to provide payslips and matching Real Time Information reports (RTIs) to confirm all taxes are being paid directly to HMRC.
  • Is there a qualified, registered accountant behind the scenes?
  • Ask for a screen shot of their HMRC account on PAYE and VAT. Whilst these will often show outstanding balances the important point to look for is whether fines, penalties or interest has been applied as this could suggest an issue. Where this is the case clarification would need to be sought.
  • Check VAT registration – ask for their VAT number and check its validity here
  • Do they have appropriate insurance cover to protect their employees?
  • Review their contract of employment to ensure they offer the same rights as any other employed person, including holiday pay, pension and expenses entitlement.
  • Be wary of referral fees and how they are provided – these could contravene the Bribery Act if not transparent.
  • Ensure all documentation is in place, including and not limited to any opt-outs, entitlement to work in the UK, and timesheets.

At the very least, ensure that the company is a member of the FSCA or Professional Passport approved. The FSCA is a membership association that ensures its members undergo a comprehensive review of their business services, operations, policies and processes.

Stick to your compliance checks

Ensuring that your own internal compliance processes are robust regardless of whether you work with umbrella companies or not. Umbrella companies will carry out compliance checks but we recommend that you also carry out some of these checks too.  

The most likely reason for a recruitment company to use an umbrella company is to mitigate risk, however ensuring your contractors, and you, are working with compliant and ethical umbrella companies will be key. We recommend you check out the ASPCo Umbrella Affiliates, all of whom have passed APSCo’s rigorous application process and are required to undertake an annual external compliance review.

If you have any queries please contact Marie Pegram on 01462 687333 or by email

UHY Hacker Young are recruitment sector specialists and provide expert advice on accounting, finance, taxation and business growth. We understand recruitment and can support you through the ever-changing landscape of this fast-paced industry. With IR35 changes around the corner we can help you build a robust system to tackle this challenge, provide payroll support and review your existing contracts with assistance from our network of other recruitment specialists. 

For a simple overview on umbrella companies you can watch our short video: IR35 – contractors within the scope, your responsibility

For more information on the key deadlines and guidance ahead of the changes being introduced on 6th April 2021 please download our IR35 Off-Payroll Reform Guide for Recruitment Businesses:

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