Do you use an umbrella company?
One of the more frustrating things about commercial finance is that the businesses most affected by change are often not the ones that caused the problem in the first place. This is where the recruitment market now finds itself with the new umbrella company legislation coming into effect. HMRC has decided it doesn’t want to keep losing money through poor practice and phoenix-style arrangements, and lenders have reacted in the way they do when something becomes difficult to understand – they tighten everything.
In some cases, they’re right to be cautious, because there are recruitment businesses using umbrella companies in ways that create genuine exposure, particularly where PAYE workers are paid through a third-party umbrella company, where that umbrella is extending credit to the agency, and where the tax position behind the scenes isn’t as clean as it should be. The problem is that too many lenders are now treating recruitment as one big lump, and sadly, good businesses get caught in the crossfire.
I’ve sat in meetings recently where this became painfully obvious. In one day, I found myself explaining the same point to five different invoice finance companies, which is that PAYE, CIS and limited company contractor models are not the same thing. They don’t carry the same risk, they don’t work in the same way and they shouldn’t be underwritten as though they do.
Yet that’s exactly what I’ve seen starting to happen.
Recruitment has always been a strong market for invoice finance, and historically, funders liked it. The debt was usually clean, the work evidenced by timesheets, the end clients often decent quality, and collections relatively predictable. But once HMRC risk started being discussed around umbrella companies, a lot of lenders stopped looking at the detail and started looking at the sector label. If it said recruitment, and if an umbrella company appeared anywhere in the structure, the shutters started coming down. Panic dressed up in policy in my opinion.
Real risk of umbrella companies
Used properly, umbrella companies perform a legitimate function – they manage payroll, tax and National Insurance, and remove a lot of administrative burden from recruitment agencies. The concern is in how some arrangements are funded – certain umbrella companies offer agencies credit terms, paying workers immediately while allowing the agency to settle later. But how is that credit actually being funded?
If tax and National Insurance deductions are effectively being used to support those credit terms, the structure becomes far more fragile than it first appears. The workers have been paid, the agency has bought itself time, but if the umbrella fails before HMRC has been paid, the liability doesn’t just disappear. That’s what HMRC is trying to stop and frankly, you can understand why. There have been too many situations where tax has gone unpaid, companies have collapsed, and the same people have reappeared under another name weeks later.
So the legislation makes sense in principle – if an umbrella company fails to pay the tax, HMRC can now pursue the chain. That could mean the recruitment agency and, depending on the structure, potentially the end client too. For lenders, that creates a new question. It’s no longer simply “will the debtor pay the invoice?”, it’s “is there a tax exposure sitting behind this payroll structure that could affect recovery?” It’s a valid question – but, not every recruitment business has the same exposure.
Not all recruitment carries the same risk
A care agency using umbrella company paid PAYE workers in a high-volume temporary labour model is very different from an IT recruitment business placing limited company contractors. A construction recruiter using CIS is different again. These are not minor technical differences, they’re fundamental to understanding where the risk exists. If you don’t understand those distinctions, you can’t assess the risk properly. Businesses are being asked blunt questions by lenders who don’t fully understand the answers, or they’re being restricted because someone in an underwriting team has decided that ‘umbrella company’ automatically equals ‘problem’.
I’ve seen situations where the exposure can be clearly explained, monitored and controlled, but I’ve also seen lenders arrive at meetings already nervous, while struggling to articulate precisely what they’re nervous about. If a funder understands the risk, you can usually work through it – assessing the umbrella provider, the payment structure, the compliance position, whether they’re FCSA accredited and where the liability exists. But if the funder doesn’t understand the structure, the answer often becomes no, not because the business is unfinanceable, but because the person making the decision can’t separate real risk from perceived risk.
Recruitment businesses rely heavily on funding lines, payroll is weekly, but invoices may not be paid for 30, 45 or 60 days. That gap must be funded somehow. The best recruitment businesses will be the ones prepared to have that conversation – they’ll know exactly how their payroll operates, they’ll understand the difference between PAYE, CIS and limited company contractor models, and they’ll want to ensure the structure is compliant.
They don’t need blanket refusals, they need lenders and brokers who understand the market well enough to assess the detail properly.
At the moment, too many good businesses are being judged by people who see the word ‘umbrella’ but don’t really understand what’s underneath it.
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