Unusually, the government has opened a consultation to “call for evidence to ensure it has an up-to-date and well-informed view of how the umbrella company market operates”. Is this a sign that the umbrella company is on the verge of being regulated by the government? Keep reading, and we’ll summarise the government’s open consultation on the umbrella company market, and we’ll share the thoughts of expert stakeholders in the payroll sector.
Published on Tuesday the 30th November 2021, the government has opened a consultation (Call For Evidence: umbrella company market) to try and get a better understanding of how umbrella companies operate in the United Kingdom. In a 37-page PDF document, the consultation consists of five chapters and includes several questions that ask specific stakeholders to share their experiences with umbrella companies.
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Keep reading because we have summarised the government’s consultation document and shared some of the responses from high-profile stakeholders in the temporary workforce and payroll sector.
What is in the government’s umbrella company consultation document?
We recommend you read the government’s consultation document yourself, and it’s available here. However, here is a summary of its content, running through each of the five chapters.
Chapter 1: Introduction
In the introduction, the government acknowledge that “the increased complexity of the labour market, and the umbrella company model itself, has presented tax and regulatory challenges”. The government also states at point 1.9 that they are “aware of concerns regarding non-compliance with employment law, including umbrella companies failing to provide employment rights such as holiday pay, and poor market practices, for example, a lack of transparency over pay rates, fees and charges”.
Unquestionably, the government has been heavily urged by stakeholders to issue regulations or rules to protect temporary workers from unethical payroll providers. The consultation document states:
“The government recognises the concerns expressed by Parliamentarians and other stakeholders about the risks that abuse of the umbrella company model can pose both to workers and to taxpayers. It is grateful for the representations it has already received from bodies such as the Low Incomes Tax Reform Group and others, as well as the recommendation from the House of Lords Economic Affairs Committee Finance Bill Sub-Committee that it focus on the risks associated with umbrella companies”.
Point 1.13 continues from the above and states:
“The government expects all parties within the labour market to take responsibility for ensuring high standards of tax and employment rights compliance and suitable protection for all workers. This document sets out the action that the government has already taken and is committed to taking in the umbrella company market. For instance, the government has already committed to regulating umbrella companies through a new single enforcement body in its response to the consultation on establishing the single enforcement body for employment rights in June 2021″.
The overall aim of the consultation is to “give a rounded understanding of the umbrella company market and how it contributes to the overall labour market”. The government is actively asking for assistance from those who have experience using them for payroll or from a hiring perspective. There is an opportunity for respondents to provide detailed answers to pre-determined questions, but “respondents need not limit their comments solely to the questions asked”.
The government will share its findings in due course.
Chapter 2: The Role of Umbrella Companies in the Labour Market
In this section, the government admit that “umbrella companies are not currently defined in legislation”. However, there is an overview of how umbrella companies operate, as well as the legal responsibilities of umbrellas in relation to administration, taxing employees and providing employment rights. There is then an overview of how typical umbrella company arrangements work (available on page 7, if you are interested in having a read).
Point 2.9 is particularly interesting. Throughout the umbrellacompanies.org.uk website, we suggest that our readers only consider using umbrella companies accredited by either the Freelancer and Contractor Services Association (FCSA) or Professional Passport. This is because these are the two most respected professional bodies in the UK that are committed to ensuring the supply chain of temporary workers is compliant with the government’s rules and regulations. Interesting in the consultation report, the government acknowledges these professional bodies. The consultation document states:
“The government welcomes efforts by the recruitment and employment intermediaries sector to raise and maintain high standards of compliance, ensuring that workers receive the rights to which they are entitled and that taxes are correctly deducted and paid to HMRC”.
However, point 2.9 continues with an important reminder for stakeholders:
“…accreditation is not a guarantee of compliance, and the government recognises that membership of an accreditation or other trade body is voluntary. Clients, workers and employment businesses are free to contract with umbrella companies that do not sign up to these standards”.
Chapter 2 concludes with 16 questions that are targeted at employment businesses and clients who work directly with umbrella companies. These questions start on page 12 and end on page 13.
Chapter 3: Employment Rights Issues in the Umbrella Company Market
The third chapter provides an overview of the three main pieces of legislation that affect employment rights in the recruitment sector:
- Employment Agencies Act 1973 (the 1973 Act);
- The Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the Conduct Regulations);
- The Agency Workers Regulations 2010 (AWR).
Points 3.7 and 3.8 references additional work undertaken by the government to improve the protection that agency workers have, including references of the Good Work Plan (2018) and the response to the consultation that discussed forming a “single enforcement body for employment rights”.
The government admit that “regulating umbrella companies is a multi-stage process”, but they suggest they have already made a start by making Key Information Documents (KID) compulsory for temporary assignments.
Point 3.20 is significant. It implies that the government will, at some point, be rolling out regulations into the umbrella company sector. Point 3.20 states:
“The government therefore intends to go further, though this will be a multistage process. The next stage to do that will be to bring umbrella companies into scope of the framework that regulates employment agencies and employment businesses which is currently enforced by the Employment Agency Standards Inspectorate (EAS). This will require primary legislation”.
The third chapter concludes with a series of questions for temporary workers to answer about their experiences using an umbrella company for payroll purposes (pages 17 and 18).
Chapter 4: Tax Non-Compliance in the Umbrella Company Market
It is no secret that the government is well aware of tax avoidance schemes targeting UK workers. The fourth chapter opens with an overview of tax avoidance and who the government know is using and promoting them. the rest of the chapter goes on to summarise tax avoidance schemes and disguised remuneration arrangements, along with what the government is doing to stop them from operating (including new anti-avoidance regimes that were included in the Finance Act 2021).
Later in chapter four, the government remind us about the dangers posed by mini umbrella company fraud – a topic we’ve covered frequently on the umbrellacompanies.org.uk website. Point 4.20 states:
“HMRC is also taking action against the use of umbrella company type structures to facilitate mini umbrella company (MUC) fraud. MUC fraud involves the disaggregation of a larger umbrella company workforce into a large number of smaller umbrella companies, each typically employing only a few workers, in order to fraudulently benefit from tax reliefs aimed at smaller businesses. As in the case of disguised remuneration, umbrella companies may be particularly useful structures for facilitating this type of non-compliance because of the relative ease with which these companies can be established and collapsed”.
It is worth noting that there are some very interesting infographics included in chapter four. Please see pages 21 and 23.
At the end of the chapter, there are a series of questions aimed at employment businesses and end-hirers (page 26).
Chapter 5: Next Steps
The government confirm “parties involved in the labour supply chain have a responsibility to ensure good compliance with tax and rights obligations, and to prevent exploitation”. They also reference that self-regulation exists, but more can be done.
Point 5.3 proves the governments intent to have a more hands-on approach to regulating the umbrella company marketplace. They say:
“The government is prepared to intervene where there is evidence of poor compliance with employment rights and tax obligations. Successive governments and HMRC has already taken robust action to clarify obligations, reduce non-compliance and tackle fraud”.
Point 5.4 and 5.5 continue:
“The government has already committed to protect further the rights of agency workers who work through umbrella companies, by bringing these companies in scope of state enforcement.
The government keeps labour market trends under review, and carefully considers industry and stakeholder feedback. The government will use the information gathered through this Call for Evidence to inform any future policy decisions in this area. It will publish a summary of responses in due course”.
Please share your experiences with the government to help shape a better future for umbrella company employees
This is your opportunity to share your umbrella company experiences with the government – whether you’re a temporary worker, represent a recruitment agency or work at an end-hirer. Whether your experiences have been positive or negative, it’s vital the government receives as much information as possible so that future regulations (if introduced) are as beneficial as possible to the entire supply chain.
Assisting the government with the umbrella company consultation is easy. Please read the official document here, and provide the relevant information and answers to the questions within the document that apply to your demographic. When you have answered the questions, please email them to umbrellacompanyevidence@hmtreasury.gov.uk. You can also submit your answers via post by sending them to the following address: Umbrella Company Call for Evidence, Personal Tax Team, HM Treasury, 1 Horse Guards Road, London, SW1A 2HQ.
Please, if your input is valuable to securing a better future for umbrella company employees. If you have the time, participate in the consultation!
How have important figures in the industry responded to the government’s umbrella company consultation?
The founder of IWORK (independents Works), Julia Kermode, welcomes the government consultation. She told Contractor UK:
“It’s very interesting HMT specifically asks for responses from people working through an umbrella.
So if Contractor UK readers want to influence the shape of future regulation, which is coming as the consultation calls itself a ‘complement’ to enforcement, this is their chance.”
Crawford Temple, CEO at Professional Passport, also expressed his support for the consultation. He said:
“It is encouraging to hear that the Treasury, HMRC and BEIS will be working together to address the issues.
However, it is important to stress that whilst policymakers are working out a more informed approach to the workings of the umbrella sector, I would like to remind them that disguised remuneration schemes and tax avoidance schemes are continuing to thrive.”
CEO of ContractorCalculator and IR35 Shield, Dave Chaplin, shared his thoughts (taken from an article published on Staffing Industry):
“We welcome this latest consultation into the umbrella market as hundreds of thousands of workers are now being given no option but to use one. Since the roll out of the Off-payroll legislation, we have witnessed a significant rise in the proliferation of disguised remuneration schemes that have duped contractors into signing up for them. Worryingly, our survey told us that 78% of contractors cannot detect a tax avoidance scheme from a compliant one.
That is a ludicrous position, when hundreds of millions, if not billions of pounds are being channelled through an unregulated sector.
Many of us made representations to Jesse Norman when he was Financial Secretary to the Treasury, urging him to regulate the umbrella sector before the roll out of the Off-payroll rules but he did not listen. With another call for evidence by the government, let’s hope they will listen now. I will be working with policymakers over the coming year to help them find and implement a fair solution.”
Kate Cottrell, Managing Director at Bauer and Cottrell, IR35 experts, said the government’s consultation is “is long overdue and very welcome”. However, she added:
“[The] Government clearly understands this market…[but] let’s hope there will be no unintended consequences as a result of any reform.”
Is the consultation the government’s way of admitting they don’t fully understand how umbrella companies operate?
Throughout 2021, and most notably in the last few months, the government has released several pieces of guidance on their website. These have been designed to help stakeholders (both temporary workers and staffing agencies) understand how compliant umbrella companies should process payroll and the associated risks of using (or referring to) a non-compliant umbrella company (tax avoidance scheme).
Now, the latest consultation could potentially suggest a lack of government knowledge on how umbrella companies operate. Rather than issue guidance about the facts of umbrella payroll, they are actively reaching out to the entire supply chain for valuable and creditable input that looks like it’ll help the government understand the goings in the payroll sector for temporary workers. It is certainly uncommon, but there are many ways you could interpret the consultation.
Another theory is that the government are on the verge of regulating the umbrella company sector. For what seems like an eternity, stakeholders have been pleading with the government to issue a series of strict regulations in the umbrella company marketplace to stop tax avoidance schemes and unethical payroll providers from preying on hard-working and vulnerable contractors and freelancers.
One certain thing, while the government does not endorse any umbrella company, they do acknowledge the existence of umbrella companies within the supply chain of temporary workers. Initially published in April 2021, ‘Working through an umbrella company’ was released to help temporary workers understand what they should be paid by a compliant umbrella (PAYE) – if they were required to use one for their assignment.
As mentioned earlier, this guidance has been followed by a flurry of additional online resources designed to help both temporary workers and organisations within the supply chain. The government has decided to approach these stakeholders actively, and it will be interesting to see what they unveil in the official finds.
For more information on existing guidance, please read our blog: What Government Guidance Is Available About Umbrella Companies?
Top 10 umbrella companies
Are you looking for a reliable umbrella company? Please check out our top 10 umbrella companies. They’re all accredited by the FCSA or Professional Passport, and some have special offers at the moment.
