Consultation to clean up umbrella industry needs more work, says industry

While generally welcoming the latest government consultation around umbrella companies, voices in the recruitment and umbrella sector have also issued warnings about possible pitfalls that could result.

Here is a sample of industry figures’ comments about the consultation, which ends on 29 August 2023.

Tania Bowers, global public policy director, APSCo: “While this is a significant consultation that will require a lot of input and insight from the staffing sector to ensure any regulatory change is fit for purpose, it is promising to see that HMRC is committed to driving long-term changes in umbrella regulation which we believe are necessary.

“Looking at the detail that is currently available, the options on defining an umbrella company into law is something APSCo will need to engage fully with members on, as any definition could create opportunities for avoidance by unscrupulous umbrella businesses.

“We are pleased to see that the government is looking to set statutory compliance standards for umbrella businesses, which is in line with our initial recommendations last year. However, rather than placing more responsibility on the umbrella industry itself… [the] government is once again seeking to rely on passing legal and tax risk up the supply chain to employment businesses and end hirers.

“We already see the uncertainty around potential HMRC enforcement that Off Payroll and managed service company legislation has created, with hard-to-quantity, long-tail potential liabilities… We will be working closely with our members to ensure that the voice of the professional staffing sector is brought to the table amid what looks set to be some significant changes to umbrella regulation.

“While it will be the finer details that need to be informed by the insight of the recruitment sector, it is a promising sign that HMRC is taking a carefully considered approach to an issue which – given the significant number of initial responses to the consultation last year – is clearly a prime concern for workers, recruiters and end hirers. It’s clear that the government is being ambitious in its plans to tackle the unscrupulous behaviour of rogue umbrella firms, but any such changes should not be to the detriment of employment businesses and the wider economy.”

Neil Carberry, CEO, the Recruitment & Employment Confederation: “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.”

Dave Chaplin, CEO of contracting authority ContractorCalculator: “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.

“The lack of visible enforcement by the authorities, combined with HMRC chasing the workers for the lost money many years later, only encourages the most egregious schemes more. It doesn’t matter how big HMRC makes the stick if they never whack anyone with it.

“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.”

Julia Kermode, CEO of umbrella company compliance specialist PayePass: “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.

“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.

“HMRC themselves admit that 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.”

Osborne Clark, law firm: “The consultation… now raises many questions but perhaps the key ones relate to the three options suggested by the government.

“Will this be the moment that the government also takes forward proposals to merge EASI [the Employment and Social Innovation programme], the Gangmasters and Labour Abuse Authority and the National Minimum Wage team at HMRC? The business secretary, Grant Shapps, was reported in December 2022 to have shelved this plan, but it is hard to see how enforcement of umbrella tax compliance could be fully effective without a single enforcement body. The consultation invites comment on this.

“Should the government go as far as introducing a licensing regime with an approach similar to that in the gangmaster legislation? Should end users or staffing companies be penalised for using workers operating via unlicensed or non-compliant umbrella companies? Or will the government merely outsource compliance by introducing (in the form of what is called option two) a regime that makes end users at the top of the chain liable for non-compliance of umbrella companies further down the chain (as with the 2017 and 2021 IR35 regimes) or (in the form of what is called option three) just making the staffing company, which engages workers via an umbrella, liable for tax (albeit outsourcing to the umbrella, which is acting as a payroll bureau, the calculation and administration of payroll and payroll tax). Rightly or wrongly, making risk-averse corporates liable tends to influence the market.

“Will the regulator have more resource and greater ability to enforce and punish? How will the government deal with the practical difficulty of needing to investigate each individual umbrella, which, as seen with the pre-2017 and 2021 IR35 regimes, stacks the odds in favour of non-compliance, given the increasing numbers of umbrellas. For example, if there is fraud, the Criminal Finances Act (or the ‘corporate criminal offence’) already applies but, so far, there has not been much obvious action yet under that legislation. This suggests that a key problem is lack of HMRC resource rather than lack of legislation.”

Crawford Temple, CEO and founder of Professional Passport, independent assessor of payment intermediary compliance: “I welcomed the call for evidence into the umbrella market as a genuine attempt by government to understand the challenges that the sector is facing. The industry has waited over a year to hear this response and it is clear that some very detailed work is required to consider all the options and identify the most appropriate way forward.

“The consultation that the government has released in tandem with [today’s] response is more encouraging and positive, and suggests that [it] 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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