The government has published its long-awaited response to a call for evidence on the umbrella company market after it launched a call for evidence in 2021.
The government sought insights and evidence regarding the use of umbrella companies and the issues surrounding the umbrella company market, and to understand why businesses and individuals opt for umbrella companies and explore potential interventions to prevent market abuses.
In its response, published today, alongside a new consultation on tackling non-compliance, the government has proposed: new ways of defining umbrella companies; mandating proper due diligence around compliance; regulating umbrella companies for employment rights; and tackling tax non-compliance in the contingent labour market.
Dave Chaplin, CEO of ContractorCalculator said: “There are no surprises in today’s response and subsequent consultation by the government on umbrellas and it is good to hear that finally, the government is stepping in to clean up an industry that harbours a murky side, giving the whole industry a bad name.
Umbrella companies
‘Unfair IR35 led to rise of rogue umbrella companies’
“After the IR35 reforms reached the private sector in April 2021, we now have billions of pounds being channelled to workers via unregulated mechanisms, where any Tom, Dick or Harry can set up and run an umbrella. What did the government think would happen?”
He added: “The consultation document suggests that a behavioural effect to policing will be used, whereby clients and agencies in the supply chain will be saddled with liability if the umbrella fails to process payments correctly. That’s a sensible idea.”
Neil Carberry, chief executive of the Recruitment and Employment Confederation, said: “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.”
Julia Kermode, CEO of umbrella company compliance specialist PayePass, commented: “This is a mixed bag. There are some valid proposals, like ensuring proper due diligence is carried out on umbrella companies and holding the supply chain accountable if they fail to do so. But at the same time, the government is putting forward ideas which need real work and threaten how the wider recruitment sector operates.
After the IR35 reforms reached the private sector in April 2021, we now have billions of pounds being channelled to workers via unregulated mechanisms, where any Tom, Dick or Harry can set up and run an umbrella. What did the government think would happen?” – Dave Chaplin, ContractorCalculator
“It’s taken a year and a half for the government to publish this response, which doesn’t actually resolve any immediate concerns. There are plenty of recommendations being put forward, but very little action. The reality is, the longer that the government sits on its hands, the more problems it creates.”
She added HMRC has admitted the majority of disguised remuneration tax avoidance schemes operate within the contracting sector. “They masquerade as compliant umbrellas, posing a huge personal financial risk to over 500,000 people working in this way – some of whom have no choice about their umbrella. But not only are innocent workers affected; the Treasury also misses out on billions in tax due to these immoral schemes,” she said.
Crawford Temple, CEO and founder of Professional Passport, an independent assessor of payment intermediary compliance, said: “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.”
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