Government publishes consultation to regulate the umbrella market

A Government call for evidence in the umbrella company market was published in November 2021 and closed on 22 February 2022. A response summarising the evidence was published on 06 June 2023 with a further consultation titled Tackling non-compliance in the umbrella company market, which seeks views on proposals to tackle non-compliance with both tax and employment rights by umbrella companies.

The Government has explained that they "want to encourage a flexible, dynamic labour market, but this aim should not be achieved at the expense of workers. New ways of working must lead to fair outcomes for workers while guarding against abuse of the new systems by fraudulent participants."

The Government's consultation has outlined three main objectives for the umbrella market:

1. delivering improved outcomes for workers,
2. supporting a level playing field in the umbrella market, and
3. protecting taxpayers from the significant revenue losses that currently arise from non-compliance.

The Government is inviting written responses to 52 questions by 29 August 2023.

What are the main findings of the Call for Evidence regarding umbrella companies?

There were over 400 individual responses to the Call for Evidence. These comprised 354 responses from individual workers, 19 employment businesses, 15 trade bodies representing various stakeholders, 8 umbrella companies, 6 accountants with specific or general interest, 4 trade unions,3 public bodies, and 2 end clients.

Dave Chaplin, CEO of ContractorCalculator, questions the dataset: "With an umbrella market estimated to be closer to 800 umbrellas, the survey may only represent 1% of those companies. Why didn't more of them submit responses, given most of them must want non-compliance driven out the market?"

Respondents that used umbrella companies explained that cost considerations around hiring workers led them towards using them, and some mentioned that an umbrella company would also be responsible for complying with employment rights legislation.

Cost savings were also highlighted, and there was a preference to hire workers through umbrella companies where they would otherwise have been inside the off-payroll working rules ("IR35") because using umbrellas takes workers out of the scope of IR35.

The main reason workers stated they used umbrellas was due to the insistence by the client or agency on using an umbrella, otherwise, the worker would lose the work.

What disadvantages did Government uncover regarding the use of umbrella companies?

Several disadvantages and concerns were catalogued, including:

1. Non-compliance with tax and employment rules.
2. Issues around pay leading to dissatisfaction among workers.
3. Jobs advertised at a higher rate (known as the assignment rate) than the rate ultimately received by the worker.
4. Pay structure problems fuelling issues for workers seeking to prove their true pay level.
5. Preferred supplier lists (PSLs) created a closed shop by denying some umbrellas access to the contingent labour market.
6. Difficulties by workers in understanding payslips.
7. A lack of transparency on pay rates, fees and charges.
8. Workers unsure who was responsible for their pay, employment rights and employment status.
9. Requests for introducing limits over umbrella companies charges.
10. Disguised remuneration tax avoidance and fraud.
11. Umbrella companies failing to provide employment rights such as holiday pay.
12. Evidence of tax fraud through mini umbrella companies.
13. Employment businesses raised non-compliance as the main disadvantage of working with umbrellas.
14. Lack of understanding by workers as to how the umbrella process works.
15. Friction between the worker and the umbrella company over confusion between assignment rate and worker's gross pay.
16. Perceived lack of oversight and visibility that a client has over the supply chain.
17. Concerns that 'kickbacks' could result in employment businesses not undertaking the necessary due diligence on umbrellas.
18. Concerns that industry accreditations were no guarantee of compliance.
19. More enforcement may be needed to ensure Key Information Documents are being provided.
20. Workers receiving lower pay than expected and the perception that workers paid employers' NICs.
21. Requirements to opt out of the Conduct Regulations offered lower protection to workers.
22. Worry over potential leaks of personal details due to security leaks and cyber attacks.
23. Most umbrella workers said that they would prefer to work in some other way.
24. Accreditation acting as a barrier to entry for smaller or newer firms.

Chaplin says: "The length of the list of concerns speaks volumes, which explains why Government has finally decided to act."

Which findings about umbrellas mostly concerned Government?

The Government acknowledged that many businesses valued the umbrella engagement model and confirmed they have no desire to ban umbrella companies. But, the Government was concerned that the main drivers for using umbrella companies were reduced costs to employment businesses and clients and incorrect treatment of workers.

Specific Government concerns included:

• Businesses engaging workers unknowingly through non-compliant umbrella companies
• Non-compliance leading to an unlevel playing field.
• Businesses reliant on accreditations but undertaking few, if any, additional checks
• Businesses unaware of parties making up their labour supply chains or whether workers were supplied via umbrella companies.

Overall, the findings suggested to Government that the temporary labour market incentivises some businesses to seek to engage workers in a way that shields them from responsibility for whether these workers are engaged in a compliant way.

The Government signalled that their consultation would seek to reduce umbrella non-compliance by giving businesses a greater stake through whom they engage labour.

Chaplin decodes the Government's language: "HMRC have effectively conceded they do not have the resources to enforce compliance themselves, so will be making clients and agencies the umbrella police force, by using powerful debt transfer provisions. If the umbrella defaults on compliance, the agency or client will pick up the bill."

What are the proposed measures to tackle non-compliance in the umbrella company market?

The Government acknowledges that umbrella companies are generally unregulated and that to enable regulation, umbrella companies must first be defined in law. The consultation has proposed two possible approaches to defining umbrella companies. Once defined in the statute, secondary legislation will be considered under a future consultation alongside ideas for how enforcement might work.

To tackle non-compliance, there are three options proposed:

1. Mandating due diligence
2. Transferring umbrella tax debt to other parties in the supply chain
3. Making employment business the "deemed employer" for tax purposes where umbrellas are involved.

Chaplin says: "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."

Chaplin speculates on what he thinks is the likely outcome of the consultation: "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 is the timeline for implementing these measures?

Whilst there are no published timings on when changes might happen, Dave Chaplin, CEO of ContractorCalculator, says: "Given the level of concerns raised jointly by three separate departments in the published response, and the specific nature of the details of the options in the consultation, a safe bet would be draft legislation towards the end of 2023, and legislation entering statute in the next Finance Bill 2024."