Exciting news – umbrella company regulations remain on the government’s mind as a new consultation is launched to tackle non-compliance within the umbrella company sector. In November 2021, the government published a call for evidence in the umbrella company sector. On the 6th of June 2023, the results were published, along with a new consultation entitled ‘Tackling non-compliance in the umbrella company market’. Please keep reading for more information about the government’s new consultation, what this means for the future of the umbrella company sector and the potential rollout of regulations.
The official consultation document (entitled: Tackling non-compliance in the umbrella company market) is now available for you to view. Please read this thoroughly, and if you believe you can contribute, don’t hesitate to share your views with the government. Information on how to do this is available on page 48 of the consultation document or towards the bottom of this article.
An introduction to the new consultation – what does the government already know about umbrella companies?
The consultation starts off with an introduction to umbrella companies and summarises responses to the Call for Evidence on the umbrella company market, which was published in 2021 (and closed in 2022). Here are some of the key points:
- There are over 1.7 million temporary workers in the UK.
- The call for evidence received over “400 responses received from industry representatives, umbrella companies, employment businesses and umbrella company employees”.
- Many workers who responded to the call for evidence implied they did not have much choice in using an umbrella company, and many felt they had not been paid correctly.
- Contractors and freelancers are worried about non-compliance and being paid unethically by a tax avoidance scheme.
- Some workers do prefer using umbrella companies and being employed for temporary assignments in this method.
- There were several respondents to the call for evidence who wanted umbrella companies to be outlawed completely.
What has the government done recently to promote compliance in the umbrella company sector and educate the supply chain?
In response to the call for evidence on the umbrella company marketplace, which closed on the 22nd of February 2022, the government has published its findings and opened a new consultation to encourage industry stakeholders to share their views on the regulation of umbrella companies.
Unquestionably, the government has been actively trying to improve compliance within the umbrella company sector, and they have been actively producing new content aimed at contractors, freelancers and stakeholders within the temporary worker payroll sector.
Chapter two of the consultation document provides an overview of what the government has already done to try and promote compliance and protect the supply chain from tax avoidance schemes (and unethical umbrella companies). There has certainly been more government guidance released on umbrella companies over the last couple of years, and we are regularly writing articles featuring official advice and news from the government.
Here are some of the things the government has and will be doing to promote compliance and support temporary workers and the supply chain in the UK:
- Released official guidance called Working through an umbrella company (2021) which explains how compliant umbrella companies should operate and process PAYE of employees.
- Publish information about Key Information Documents (KID) for umbrella employees, including why they are important and how they should be created.
- Continue to explore new ways to promote compliance through written content for temporary workers and “employment businesses who contract with umbrella companies”.
- Exploring the option of releasing an umbrella company calculator to help contractors and freelancers. The objective of this calculator would be to provide workers with a clear understanding of the mechanics behind their pay, as well as an accurate description of the deductions made by the umbrella company.
- Amendments to the Finance Act 2022 – giving HMRC the ability to publish news about tax avoidance schemes and promoters quicker. More information on this can be found in the corporate report entitled Named tax avoidance schemes, promoters, enablers and suppliers.
- Publish regular information as part of the Spotlight series – designed to alert workers about tax avoidance schemes being offered by non-compliant umbrella companies. The most recent Spotlight publication was in August (2022) and is available here: Warning for agency workers and contractors employed by umbrella companies (Spotlight 60).
- Teamed up with the Advertising Standards Authority (ASA) to share information about how promoters of tax avoidance schemes advertise the unethical services, including internet ads.
- Published a new consultation entitled Tougher consequences for promoters of tax avoidance with the intention to gather stakeholder “views on two proposals to bring tougher consequences on promoters of tax avoidance.”
- Released a corporate report called Use of marketed tax avoidance schemes in the UK (2020 to 2021), providing stakeholders with information “about the avoidance market, focusing on the tax year 2020 to 2021.”
The government has three objectives for the UK’s umbrella company industry
In the Executive Summary, the government explains three primary objectives for regulating the umbrella company sector.
- Deliver improved outcomes for workers
- Support a level playing field in the umbrella company market
- Protect taxpayers from the significant revenue losses that currently arise from non-compliance
Regulating umbrella companies
In chapter 3, the government outlined a series of options to help improve transparency in the umbrella company sector and protect temporary workers who engage with them for payroll purposes. Here are some of the key points:
The government understand the importance of providing an official definition of an umbrella company – to help the supply chain understand how legitimate umbrella companies operate and make it more obvious when a provider is acting non-compliantly.
Once a definition is agreed, the government must create a set of standards that all compliant umbrella companies must adhere to. Once these standards have been agreed, there must be a clear understanding of how they will be enforced and the ongoing consequences of non-compliance.
Stopping non-compliance within the umbrella company sector
In chapter 4, the government outline the possible options to target and stop non-compliance within the umbrella company sector.
Option 1 focuses on “mandating due diligence” and introducing minimum requirements that all companies working with contractors must follow when approaching umbrella companies to pay temporary workers. Should a business (such as a recruitment agency) fail to comply with the new due diligence requirements, they would face a penalty.
Option 2 outlines a potential plan to allow debts that cannot be settled by an umbrella company to be passed down the supply chain. Point 4.17 (page 33) states:
“To address the challenges of collecting unpaid tax owed by a non-compliant umbrella company, the government could legislate to give HMRC the power to transfer an umbrella company’s tax debt to another party in the labour supply chain, in circumstances where this debt cannot be collected from the umbrella company itself.”
Option 3 summarises a plan where umbrella companies would not be allowed to handle the gross funds of temporary workers. This would place more responsibility on other parties within the supply chain. For example, a recruitment agency would be required to make the tax and NI deductions for an employee before passing these funds down the chain to the umbrella. The government believe this would stop non-compliant umbrella companies from messing around with workers’ pay and treating it as “non-taxable”.
How have stakeholders in the umbrella company sector reacted?
Unsurprisingly, key figures in the contractor payroll sector have been quick to share their views on the new government consultation about the regulation of umbrella companies.
“If a sound statutory definition for an umbrella is achieved, then the easiest route would be debt transfer provisions of any umbrella tax debts”
Dave Chaplin, CEO at ContractorCalculator, shared his views on the three options put forward by the government. In an article on ContractorCalculator, he said:
“Option 1 is unlikely because, without hard lines drawn, it will have no teeth. With hard lines drawn, it will be easily circumvented by rogue umbrellas.
Option 2 seems inevitable, and it’s just a case of how to do it. The easy answer is copying the Managed Service Companies legislation’s debt transfer provisions.
Option 3 would eliminate the non-compliance overnight because the behavioural effect is likely to mean agencies would run their payrolls and not bother with umbrellas.”
Dave Chaplin then shared his opinion on what the outcome of the government consultation will be:
“If a sound statutory definition for an umbrella is achieved, then the easiest route would be debt transfer provisions of any umbrella tax debts. The behavioural effect would necessitate employment businesses implementing sound due-diligence practices and oversight. The combined effect of industry accreditations and independent auditing of the money flows would be the sensible route.”
“What we have been all waiting for”
“Finally, what we have all been waiting for – the government’s consultation into tackling tax avoidance in the umbrella market!
One option being considered is to prevent umbrella companies handling gross funds! This would be MASSIVE for the whole industry, recruiters, and workers.”
“Any rules will need a strong enforcement framework”
“Regulation of umbrella companies is long overdue. Today’s announcement represents progress that is crucial to a sustainable temporary work market. Unlike recruitment firms, umbrellas currently operate without a specific regulatory framework, leaving workers and employment businesses at risk of non-compliance on worker rights and tax. While there are voluntary standards and audits in place for these firms, a strong legislative base is necessary. This consultation is a step towards that.
The use of a simpler definition of umbrellas is helpful because it will help everyone understand the rules and hold umbrella companies accountable. We will talk to our members about individual proposals before responding formally, but we already know that we need progress on the creation of a suitably resourced Single Enforcement Body (SEB) to make sure any regulation is complied with. Umbrella companies are prone to evolving quickly and have complex structures, so any rules will need a strong enforcement framework. This can’t be bodged by handing responsibility to someone else in the supply chain.”
“There is a lot of work to be done”
“The consultation that the government has released in tandem with today’s response is more encouraging and positive and suggests that the government is keen to adopt a new approach and intends to raise the bar across the industry.
I applaud that stance. It is therefore vital that the government, accreditation bodies, clients and recruiters now work together. There is a lot of work to be done, specifically in the areas around due diligence and debt transfer as one example, and we would urge HMRC to take us up on our suggestion to form a working group of experts so that together the industry can move forward for the better and benefit of our sector.”
“The more done to put a stop to these schemes, the better”
“It’s certainly time that action is taken. As many will know, thousands of contractors had no option but to work via umbrella companies after the off-payroll rules were introduced. The problem, however – other than the fact that many of these contractors belonged outside of IR35 – is that the umbrella industry is unregulated. Tax avoidance schemes dressed up as umbrella companies are commonplace and they pose a huge threat to individuals working through them. Like I said, the more done to put a stop to these schemes, the better.”
“The government is focusing on the right areas”
“We are relieved to see a consultation document has been published at long last.
First impressions are that the government is focusing on the right areas… but that much of it hinges on accurately defining what an umbrella company is.”
“Waste of print”
Interestingly, an ex-HMRC worker described the new consultation as a “waste of print”. Ex-tax official, Graham Webber, said:
“The opening line of the [consultation] document summarises the problem and the fact that without solving it, everything else in this document is a waste of print.
[That line states] ‘The purpose of this consultation is to seek views on proposals to tackle non-compliance with both tax and employment rights by umbrella companies.’”
How can you contribute towards the government’s consultation on the regulation of umbrella companies?
The government’s consultation includes 52 questions that contractors, freelancers, umbrella representatives and professionals in the staffing industry are encouraged to answer before the deadline on the 29th of August 2023. All the questions can be found in the official document on page 51.
To send your responses to HMRC, you can:
- Send an email to: firstname.lastname@example.org.
- Post written responses to Umbrella Companies Consultation, Room 3E/04, 100 Parliament Street, Westminster, SW1A 2BQ.
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