Off-payroll working reforms have resulted in increased use of ‘rogue’ umbrella companies, along with a number of workers who are being treated as employees for tax purposes, but without employment rights, a House of Lords committee has claimed.
In a letter to the Treasury’s financial secretary Lucy Frazer, the chair of the economic affairs finance bill sub-committee raised concerns about a rising number of umbrella companies that had been set up to “lure” contractors with unrealistic and unfair offers so that they could continue to work under the off-payroll working rules.
An evidence session in front of the committee in December was told there had been a fivefold increase in the number of individuals working through umbrella companies over the past 15 years. HMRC estimated that 100,000 individuals were working through umbrella companies in 2007–08 but by 2020–21 this had increased to at least 500,000. Other commentators estimated the true figure at 600,000.
In his letter to Frazer, Lord Bridges of Headley says: “The [extension of the] off-payroll rules to the private sector is resulting in greater numbers of people using umbrella companies; and increasing the risk that some individuals, particularly those on low incomes, will become involved with rogue umbrella companies associated with tax avoidance. Paradoxically, this appears to substitute one form of tax avoidance for another.”
The letter goes on to highlight “the mismatch between tax law and employment”, which has resulted in individuals being treated as employees for tax purposes, but without employment rights.
“In taking forward the off-payroll working reforms, the government has focussed too narrowly on tax issues and not enough on wider issues of fairness,” the letter says.
“Above all, if the government is truly committed to fairness in the workplace, it must take a coherent approach to the issue of employment status, which considers both tax and employment rights. It is unfair that individuals are treated as employees for tax purposes but without the rights which are normally associated with employment. To address this, the government should press ahead with implementing the proposals set out in the Taylor Review as the sub-committee recommended in our 2020 report.”
It added that the committee felt the government had “been slow to act against the harm caused by the activity of non-compliant umbrella companies” and wants to see it consider greater protections for workers using the services of umbrella companies.
It is unfair that individuals are treated as employees for tax purposes but without the rights which are normally associated with employment” – Lord Bridges of Headley
“In the absence of effective statutory action, umbrella companies are proliferating. More and more individuals are at risk of getting caught up in tax avoidance schemes. The government needs to commit to a date for bringing forward legislation to create the proposed single enforcement body to regulate umbrella companies,” the letter says.
In November 2021 the government launched a call for evidence inviting views about the role that umbrella companies play in the labour market. The letter presses Frazer for an early indication of how the government intends to use the information it collects, what action is proposed, and of timescales.
It follows the publication of a National Audit Office report today, which stated that employers in the public sector had not been prepared for the introduction of the IR35 reforms.
Tim Stovold, head of tax at Moore Kingston Smith, said the letter highlighted the “massive growth in the use of umbrella companies as businesses try to reduce the administrative burden of complying with IR35 rules”.
“Rogue umbrella companies are promising tax savings from spurious expense reimbursements and disguising salary payments as loans. Those falling for these promises are often low paid workers who do not have access to advisors telling them to run a mile from these schemes. Many had predicted that the reform of IR35 would fuel tax avoidance in this sector,” said Stovold.
Crawford Temple, CEO at payment intermediary compliance firm Professional Passport, said: “Over the last two years, with the country focused on Covid, there has been a lack of any visible and proactive enforcement and any enforcement we have seen has been targeted at the workers and not the promoters of the schemes who have been allowed to flourish and keep any money they make.
“It is time to stop the perpetual cycle of legislation and radically rethink and simplify the rules that work for the benefit of all those in the sector who are striving hard to raise standards and drive out those who consistently seek to break the rules and behave unethically. Let’s put an end to a sticking plaster approach to an existing framework that is fundamentally flawed.”