Umbrella company FS Commercial (FSC) has said it is “surprised and disappointed” by an independent tribunal's decision not to grant the company a GLA (Gangmasters Licensing Authority) licence and will appeal. 

In a statement on its website, the company said: “FS Commercial is both surprised and disappointed by the decision. We are confident that our payroll model is compliant with current legislation. We are taking legal advice and intend to challenge the decision by judicial review.”

As Recruiter reported yesterday, FSC applied for a GLA licence back in September 2010, with a proposal to operate a ‘pay day by pay day’ tax relief model.

However, last week this was refused. In her decision, Judge Porter described the GLA’s decision to refuse FSC a licence as “reasonable and appropriate”.

The outcome of the case, following comments made last week by shadow chancellor Ed Balls, who suggested the government should fund the postponement of January’s planned fuel duty rise by clamping down on tax avoidance by umbrella companies, has stirred further controversy about the use of such schemes in the recruitment sector.

Adrian Marlowe, chairman of the Association of Recruitment Consultancies (ARC), tells Recruiter: “If T&S schemes are not to be permitted for temporary workers then the on-cost of supplying workers will inevitably increase.” And he adds that this is likely to come at significant cost to the flexibility of working arrangements in the UK.

He continues: “Not many people on the National Minimum Wage will be willing to travel significant distances to work each day if the cost of travel results in much reduced net pay. This is at the heart of using temporary workers in low-paid situations, and is the elephant in the room.”

In the wake of the decision, Recruitment & Employment Confederation (REC) chief executive Kevin Green says: “We are urging all members to closely review any arrangements they may have with umbrella companies operating travel & subsistence schemes, as well as any schemes they operate themselves, in particular the use of any ‘pay day by pay day’ models, which now pose a significant commercial and legal risk to agencies.”

Association of Professional Staffing Companies (APSCo) CEO Ann Swain says that Balls’ comments were a “huge generalisation of a large and complex market”.

“We believe that the majority of umbrella companies work within the law, and we would not want to see yet more legislative change, which seeks to address a specific problem, and yet by the nature of its ‘one size fits all’ approach damages the whole freelance sector, which is extremely important to the UK economy.”

Swain adds that APSCo does have concerns about “the lower-paid more vulnerable sectors of the staffing industry where workers are sometimes forced into setting up their own personal service company or becoming employees of an umbrella company” and it [APSCo] “would strongly support all efforts to curtail such behaviour”.

However, she continues: “We would stress, however, that this behaviour is not indicative of the industry as a whole, and particularly not the professional staffing sector, where individuals choose to work through limited companies to provide business consultancy services.”

An HMRC spokesperson says: “This case shows how effective the GLA can be on what are resource intensive and complex financial investigations. It demonstrates the GLA’s commitment to seeing investigations through for the benefit of workers, UK plc and compliance with the law. The GLA will continue to investigate such cases and defend its decisions robustly.” 

Stuart Davis, chairman of the Freelancer and Contractor Services Association (FCSA), tells Recruiter: “The FCSA condemns the use of ‘pay day by pay day’ and similar tax avoidance schemes. It is about right and wrong.”

And Davis, adds: “While we agree with Ed Balls that there are umbrella companies who are acting outside of the law, the vast majority of professional employment-based umbrella companies provide a valuable employment status to their clients who as contractors and freelancers make up the backbone of the UK economy.

“We therefore believe that politicians should not tar all umbrella companies with the same brush and not assume a ‘one size fits all’ approach.”

The continuing controversy surrounding T&S schemes within the recruitment industry comes as a National Audit Office report published today says the Treasury is losing billions in revenue because officials are failing to clamp down effectively on aggressive tax avoidance.

The NAO says it has particular concerns about mass marketed tax avoidance schemes. These include the use of intermediaries to pay contractors or employees, with some of the money paid to the workers in interest free loans, which are never repaid, which it calculates put £600m at risk to the Treasury and have 16,000 users.