The industry of contract management is one where there are few barriers to entry. In general, this is a healthy thing which encourages new entrants to the market and ensures a wider range of choice for staffing companies and contractors. Minimal regulation does raise significant concerns, however, when you consider the amount of money that umbrella companies manage on behalf of clients.

It is the very competitiveness of the contract management market that makes the financial position of many of these companies so precarious. Umbrella companies usually go bust because their margins are squeezed by not charging contractors enough, by not controlling costs and by paying out too much to agencies in timesheet levies. This was once again brought into sharp focus when on the 26th January 2018 Link Payroll Limited entered insolvency.

Umbrella companies going bust is by no means a new phenomenon, yet the fallout for recruiters and contractors can be disastrous. In many cases, rigorous due diligence at the outset and heeding the early warning signs as they emerge can help recruiters avoid financial losses and reputational damage.


The question that comes to mind is: what are the criteria that recruiters use when deciding to use a certain provider? Is any real homework being done, or is the choice based on little more than a pleasant impression made by a persuasive sales person from a management company? Considering the potential liability for unpaid salary, tax and National Insurance which recruiters face if an umbrella company partner collapses, rigorous due diligence should be undertaken beforehand. This is doubly important given that there are providers on the market touting solutions of dubious legality.

When creating a preferred supplier’s list recruiters can take certain steps which, while not guaranteeing to completely negate the risk of an umbrella supplier going bust, will considerably reduce that risk. Should the worst happen, the checklist will offer some defence against accusations of negligence.


Meet the people who run the management/umbrella company. This sound obvious but all too often that meeting is a convivial chat in which very little of substance is gleaned. The purpose of the meeting should be to gather vital intelligence, such as whether the management team have relevant professional qualifications. These should be checked with the appropriate professional body. Have they been declared bankrupt previously or been subject to director’s disqualifications order? Their answers can be checked against the register of directors kept by Companies House: Bankruptcy orders are a matter of public record and can be searched online: insolvency
If the umbrella company is a UK business, go to and check the accounts of the business. How long has it been trading? Are its accounts fully up to date? It would be worth having a suitably qualified finance professional examine the accounts for any irregularities, which might suggest that the business is likely to experience cash-flow problems. Most countries will have an equivalent register of businesses, so if the business is registered overseas this information might still be obtainable
Order and pay for a credit check from a reputable credit agency
How many contractors does the umbrella company manage? Are customers generally satisfied? A search of relevant contractor forums might reveal whether contractors have experienced any problems regarding late payments, reclaiming expenses, tax issues etc. The Contractor UK forum is often a good source of information:
Study their website and undertake a Google search. Be wary of bloated claims e.g. inflated retention claims of up to 90 per cent and so on are indicative of hyperbole or illegality, or both. Proceed with caution when claims look too good to be true. Referring contractors to an illegal solutions provider could have severe repercussions. The Criminal Finances Act, which came into force in September 2017, increases the risk for staffing companies. Recruiters can now be held liable for facilitating tax evasion if, for example, they refer contractors to third parties providing accountancy solutions which turn out to be non-compliant. A recruiter making such a referral could be liable for unlimited fines and even criminal prosecution. It is therefore increasingly important that recruiters placing contractors conduct proper due diligence and chose accountancy partners carefully
Request trade and bank references and be sure to take them up
Check their accreditation with professional associations e.g. APSCo, Institute of Chartered Accountants in England and Wales, ISO 9001 and NEN 4400 etc.
Most of these checks can be carried out on line and so are very quick and inexpensive to undertake. Taken together, they help build up a picture about the credibility of the prospective umbrella partner and their likelihood of experiencing financial difficulty o r having their arrangements subject to challenge by HMRC. Savvy recruiters can even make a virtue of their rigorous due diligence process and communicate it in the marketing material they send to contractors. Many contractors will look favourably on recruiters which adopt this approach, and so it could even be a compelling selling point. Researching and partnering with a well-run accountancy partner should be a matter of best practice for every recruiter.