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While MPs were denied the chance to vote on a series of proposed amendments to the Finance Bill that could have potentially “curbed or killed” the umbrella company industry, stakeholders claim the fact the matter was the subject of a heated House of Commons debate is a promising development.
MPs were expected to vote on two amendments to the Finance Bill ahead of its third reading in the House of Commons on Monday 24 May 2021. The amendments called for chancellor Rishi Sunak to conduct an impact review of Clause 21 in the Finance Act, which concerns workers that provide services through intermediaries, to examine how this clause affects levels of tax avoidance.
This review should also examine whether a tweak to the IR35 off-payroll working rules that would either prohibit the operation of umbrella companies altogether or curb their activities would result in the issue of tax avoidance improving or worsening, the amendments stated.
This is in light of numerous reports linking non-compliant umbrella companies to tax avoidance schemes, as well as other forms of malpractice including the unlawful deduction of employers’ National Insurance Contributions (NICs) from the wages of the contractors who work for them.
These amendments, however, were not selected among a plethora of others put forward by MPs for inclusion in the Finance Bill 2019-2021, much to the disappointment of some within the wider contracting community.
“After considerable effort to attempt to shape reasonable amendments to the Finance Bill, it is disappointing that they were not selected to be voted on last night,” said Dave Chaplin, CEO of contracting authority at ContractorCalculator.
As a result, he advised contractors to do their due diligence before signing up to an umbrella company to protect their income and avoid finding themselves inadvertently embroiled in tax avoidance.
Why do contractors work through umbrella companies?
The roll-out of the IR35 reforms to the private sector saw multiple firms introduce issued hiring bans on limited company and personal service contractors, and announce that – post-April 2021 – they would only work with contractors who are employed by umbrella companies.
A major reason for this is that pushing contractors to work via umbrella companies absolves the end-client and the employment agency of having to have lots of contractors added to their payroll.
“A lot of end-clients and agencies don’t want to have lots of contractors on their payroll or they don’t have the services to run payroll in-house or they just don’t want to do it because it’s too much hassle,” said Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE).
“So they bring in an umbrella company, who will say ‘we recognise that it’s painful getting all these payments onto the payroll, so we will step into the contractual chain to provide that service for you’.”
Signing up to an umbrella company typically requires the contractor to cease trading as a limited company and become the umbrella’s employee, and this way of working does have some advantages for contractors, provided the company they work through operates compliantly.
For contractors, it means they can offload the day-to-day admin that comes from running a limited company to the umbrella, which also assumes responsibility for invoicing end-clients on the contractor’s behalf and ensuring the correct employment tax deductions are taken from their gross pay. These include national insurance contributions and pay as you earn (PAYE) tax, and the umbrella company will also charge admin fees.
“The continued lack of regulation and impotence by the Government on this issue will only seek to fuel the non-compliance further and I would suggest contractors conduct due diligence before signing up to any umbrella company,” he added.
“If contractors are forced to use an umbrella and not offered agency payroll, then this could be a sure sign of malpractice. Contractors should not use umbrellas unless they are 100% confident that they can check their own calculations.”
Other contracting market stakeholders, however, have been quick to make the point that – while the vote was denied – the fact the problems posed by non-complaint umbrella companies were given so much airtime during the accompanying House of Commons debate about the Finance Bill’s contents is good news.
David Davis, who tabled the amendments with the with the support of Iain Duncan Smith and Andrew Rosindell, told the House of Commons about how non-compliant umbrella companies seek to maximise their profits by using “sleight of hand tactics” to skim money from the contractors they are being paid to process the payroll of.
“This includes: misrepresenting tax thresholds; skimming off pension contributions and other payments such as the apprenticeship levy; forcing contractors to opt out of their rights as agency workers; and withholding billions in holiday pay that is legally due [to contractors],” he said.
He continued: “The frauds involved here cost the taxpayer hundreds of millions of pounds each year in lost tax, but as well as that, the boom of these non-compliant companies means that legitimate umbrella firms are being run out of business by them.
“The illegitimate umbrella companies making the most of their profits through appropriating funds through tax scams, withholding holiday pay, skimming from the apprenticeship levy and like are driving these honest firms out of business.”
Read more about non-compliant umbrella companies
- The proliferation of websites offering comparison site-like services for umbrella companies has prompted tax experts to warn IT contractors of the financial risk posed by firms offering ‘too good to be true’ take-home pay rates.
- With thousands of IT contractors set to start working through unregulated umbrella companies for the first time when the IR35 reforms take hold in the private sector, concerns are growing about the danger this could pose to their income and tax affairs in years to come.
Davis also spoke of the need for the umbrella industry to be regulated, which he described as his “preferred option” for tackling “malpractice and mis-selling” within this “problematic sector”.
As previously reported by Computer Weekly, the government was recently gifted a draft policy paper to help expedite the process of introducing regulation for umbrella companies drafted by a former senior policy advisor to the Office of Tax Simplification, Rebecca Seeley Harris with help from OffPayroll.org founder, James Poyser.
This is in the wake of criticism being directed at the government for taking so long to push through statutory regulation for umbrella companies, despite growing numbers of contractors being forced to provide their services through them since the onset of the IR35 reforms in the both the private and public sector in recent years.
“I take a lot of positives from the debate,” Julia Kermode, founder of independent worker consultancy, IWORK.co.uk, told Computer Weekly. “The speeches were brilliant and there was a lot of support [about addressing the problems with umbrellas] from MPs in all parties. Everyone who spoke had a clear understanding of the issues, and it was obvious that they genuinely care and want to bring about change.”
And while MPs may have failed to secure a vote on the umbrella company amendments, it is known that the Seeley Harris draft policy is still under consideration by the Treasury, continued Kermode. And yesterday’s debate will only serve to reinforce why the government needs to get its act together on regulating umbrella companies now.
“The message they will have received from last night’s debate is loud and clear – action is needed, and needed quickly,” said Kermode.
“For far too long umbrellas have been in the ‘too difficult’ pot with the government failing to properly understand the sector, failing to plan effective policies, and failing to take action. Umbrella regulation is long overdue now, and there is no excuse for the current hiatus.”
Seeley Harris and Poyser released a joint statement, in response to the tabled amendments not getting voted on, expressing their disappointment at this development despite the matter inspiring such a “compelling debate” in the House of Commons.
That said, the pair are of the view that the amendment that would have paved the way for umbrella companies to have ceased operating altogether would have been too heavy-handed given there are operators out there that are compliant and operating ethically.
“Regulation, which will have a more lasting impact, is now the only way ahead,” the pair said in their joint statement. “It will offer greater protection to the some 600,000 people [working through umbrellas] who are being exposed to employment rights abuses and lost income through unethical, but not yet illegal payslip skims and scams, and tax evasion schemes with no independent body to turn to for help.
“It cuts right across society from contract cleaners, warehouse operators and delivery drivers, through supply nurses, carers and track and trace teams, teachers to vets, GPs and highly skilled contractors. It must end,” they added.
Read more on IT legislation and regulation
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