Insolvent Umbrellas: Protect Your Organisation in Uncertain Times

Having a compliant and financially stable Preferred Supplier List is critical in these times of uncertainty following the global pandemic. In this article, Tim Hunt, Strategic Planning and Sales Director, explores the benefits of setting up a compliant, well-researched Preferred Supplier List (PSL) and details some of the checks you can do to protect your agency from working with suppliers that are carrying high financial risks.

The temporary employment sector is under ever-increasing pressure to conduct business responsibly and compliantly. However, this regulatory crackdown from HMRC comes at a time of financial instability following the Coronavirus pandemic where many businesses, including some Umbrella companies, will be struggling financially. This, unfortunately, has forced some Umbrellas into insolvency.

This means its now more important than ever to do your due diligence to ensure you’re not putting your agency’s finances, reputation, and contractor base at risk. Make sure you review all the existing Umbrella companies you work with as well as any new ones you’re thinking of adding to your PSL because you need to feel confident that every Umbrella supplier you work with is financially stable.

Don’t leave it until it’s too late to conduct these checks since, if an Umbrella company becomes insolvent, they’ll no longer be able to pay their contractors, leaving workers’ payments, accrued holiday pay, and pension contributions at stake. If you find yourself in this situation, you may need to make reparations, paying workers the money the Umbrella company owes them so you can avoid irreparable reputational damage to your agency.

How to Protect Your Agency

Your Preferred Supplier List (PSL)

One simple way to protect yourself and your workers is to do your research into putting together a Preferred Supplier List of the most compliant and financially sound companies you’re willing to work with. The value of a PSL cannot be understated, it can offer:

• Protection against financial liability
• Prevention of reputational damage
• Reduced administration and operating costs
• Improved brand recognition
• Increased value and appeal to investors and customers
• Greater sales and market share

Although doing your due diligence to identify the right Umbrella suppliers for your PSL may sound like a mammoth task, here, I detail some quick checks you can do to establish the risk factor of your proposed suppliers so that you can make more definite and well-researched decisions about who you’re adding to your PSL.

How to Check the Financial Stability of a Third-Party Organisation

1) Independent Audits and FCSA-Membership

A safe starting point is to check whether the Umbrella company has had its accounts, processes, and compliance obligations independently audited by a professional body, such as the FCSA.

Compliance and process auditing is carried out independently and transparently on all FCSA-membership organisations by leading regulated professional firms of accountants and lawyers. So, checking the FCSA directory of accredited members is a great place to start to explore whether the Umbrella company is upholding its compliance requirements, as working with FCSA-accredited organisations gives your agency peace of mind that these external audits have been, and will continue to be, conducted each year.

Although this is a great place to begin, if an Umbrella company is not an FCSA-accredited member, this doesn’t automatically mean they’re operating non-compliantly or that they’re financially unstable. However, before working with an Umbrella company, you should always request evidence that independent checks have been performed on their processes and compliance.

2) Companies House Filings

Before working with any Umbrella supplier, it’s also recommended you check for an external statutory audit on the Umbrella company’s accounts at Companies House. Every company’s records are available to access publicly via Companies House, so this is a quick way to assess the financial situation of any third-party organisation.

When looking at the files on Companies House, the first thing to check for is whether the company’s accounts have been independently audited or it has filed its own. If statutory accounts have not been audited independently, it could be a sign that they aren’t accurate or that the company is trying to hide a worrying balance sheet and problems with cash flow – especially if combined with poor trading results.

It’s also important to check whether the accounts have been qualified on the Independent Auditors Report page. If they have, this is typically a sign that the auditor isn’t confident in the accuracy of the accounts and may be an early indication of some financial problems.

You should also check whether the balance sheet displays healthy positive net assets and shareholders funds. Avoid any companies that display a high net liabilities position.

3) PAYE/NIC and CIS Payments

If an Umbrella company is falling behind on their tax payments, this should be a major concern to its recruitment agency clients. As part of your review, you should ask for copies of the organisation’s PAYE/NIC account with HMRC. This will display whether it is up to date with its tax payments relating to workers’ pay.

4) VAT Agreements

Many organisations were given a relief break during Covid, meaning they didn’t have to pay their VAT. As we progress further into the Coronavirus recovery plan, companies must now pay what they owe to HMRC or reach an arrangement of how they’ll repay these funds.

If the Umbrella organisation cannot continue to pay HMRC the VAT it owes, this could be evidence that it is financially unstable and experiencing issues with cash flow.

Here to Help

Whilst the list above does not remove your risks entirely, completing these few simple checks will help you steer your business away from working with Umbrella companies that present unnecessary financial risks to you and your contractors.

When you add Crest Plus to your PSL, you can feel confident that our FCSA-accredited Umbrella company is financially strong in its own right, as well as being part of the second-largest group in the UK within our sector. Having been trading for over 20 years with a strong balance sheet, you can feel confident your workers’ rights and payments are safe with us.

In these risky times, start minimising your financial risks by working with a financially stable partner. Get in touch on 01255 684700 or click here to read more about how we can help your agency grow compliantly.