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.”