Weighing up the government’s long-awaited update on umbrella market regulation, industry experts also described the government’s statement yesterday [18 April 2024] as “underwhelming and disappointing”, eight months after the ending of a consultation to reduce tax non-compliance.

In a three-paragraph comment published on Tax and Administration Maintenance Day, the government said: “To support workers and businesses that use umbrella companies, HMRC [HM Revenue & Customs] will publish new guidance later this year, including an online pay checking tool to help umbrella company workers to check whether the correct deductions are being made from their pay.

“The government is minded to introduce a due diligence requirement to drive out bad actors from labour supply chains. To this end it will continue to engage with the recruitment industry and other key stakeholders on the detail of a statutory due diligence regime for businesses that use umbrella companies, and ensure it has the best understanding of the impacts that this could have on reducing non-compliance.”

In a fiery response, regular HMRC critic Dave Chaplin, CEO of contracting authority ContractorCalculator, said the announcement from the government on how they plan to tackle tax avoidance in the umbrella industry “was a big fat nothing burger, merely kicking the can down the road. An online pay-checking tool is nothing new – there are already lots of those freely available. Big deal.

“HMRC holds all the data from all different sources, and with modern technology should be able to hook up all the data pipes and catch the perpetrators almost in real-time,” Chaplin continued.

“Today’s announcement was effectively HMRC saying ‘Sorry, we are busy, er, we promise to do something later.’ It’s embarrassing, and it’s an insult to all the people who have offered their time for free, to help solve this problem. Really, why bother?

“We have a growing situation, as evidenced by the ever-growing HMRC ‘name and shame’ list, proving something needs to be done. You don’t catch criminals by publishing a calculator.

“Instead, the non-policing of the market will continue and HMRC will continue to go after the victims.”

Matt Fryer, managing director of professional services provider Brookson Group and People 2.0, commented: “This is a kick in the teeth for compliant umbrellas who continue to operate in a market rife with non-compliant providers.” 

He added: “The introduction of an online pay checking tool window dresses the real problem. Rather than addressing the root cause, it pushes the responsibility for checking if an umbrella company is compliant onto the worker. While this gives workers better visibility of their pay, it’s unfair for them to have to undertake their own compliance checks to challenge the actions of unscrupulous, unregulated and unaccredited providers.”

Analysing the possible outcome of the government’s announcement, law firm Osborne Clarke said the message itself hints that the government’s preferred option involves introducing statutory due diligence “but it is not clear whether that will be for both employment rights and tax compliance purposes”. 

“Either way,” the law firm statement said, “there will still be a need to introduce a statutory definition of umbrella company and to clearly define what type of occurrence would trigger liability to comply with any new legislation involving the umbrella market.”

Ultimately, a "due diligence" regime may only work if accompanied by tax debt and employment liabilities passing up the chain to any organisation that fails to do the due diligence "properly" (whatever that will be deemed to mean), Osborne Clarke said. However, the announcement does “seem to indicate that option three of deeming the employment business as the employer for tax purposes is unlikely to be adopted”.

Further scorn was poured on the announcement by Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance. 

“We need a clear path forward to help the industry navigate these challenging times,” Temple said. “The government's inertia, inaction and lack of enforcement have allowed tax avoidance and non-compliance to run rampant in the umbrella company sector. Despite acknowledging the need to address this issue, the government’s repeated delays have effectively enabled criminal operators to brazenly disregard the rules with little to no consequences.”

Temple went on to say: “While the government says it is ‘minded to introduce a due diligence requirement to drive out the bad actors from the supply chain’, I would like to suggest that in an unregulated environment, the bad actors will simply find a way to skirt around their tax obligations.”

The announcement, Temple said, “is simply underwhelming and disappointing”. 

Speaking on behalf of the professional contractor and freelancer organisation IPSE, Andy Chamberlain, IPSE’s policy director, said, “We need some urgency from government. It’s been almost a year since it began consulting on the proposals – ones that should have been in place before the off-payroll working rules. With an election on the horizon, the plans are in a precarious position and risk being delayed even further.”

Recruitment trade body the Association of Professional Staffing Companies (APSCo) issued a statement from the organisation’s Tania Bowers, global public policy director, saying: “APSCo members do overall support enshrining due diligence in regulation as a first step, as this will immediately lead to a more level playing field. However, they don’t think it’s the most effective route to stop tax non-compliance.

“There are no barriers to entry to the umbrella market, which means that setting up a corporate entity and launching an umbrella company can be done in a matter of days. We believe that a licensing or registration process is required with EAS or another body, in recognition that financial wrongdoing is the largest risk to workers and the supply chain. Further, industry self-regulation should be replaced with statutory compliance codes for the umbrella sector itself.”

Bowers went on to say, “clear definitions and licensing of the umbrella sector are needed”. She concluded: “As we highlighted in our initial consultation response, the definition of umbrella companies needs more clarity and should also allow for marketplace evolution. The announcement today doesn’t, in our view, address this.”

The announcement is available at the UK Government website.

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