Brian Jackson -

Umbrella market regulation: Government seeks contractor guidance on how to proceed

The government has published the results of its long-awaited consultation into the inner workings of the umbrella market, and followed it up with another one that seems to suggest sector regulation is moving one step closer

The UK government is seeking views on how best to regulate the umbrella company sector, following the publication of its highly anticipated market review that saw it outline its commitment to curbing the prevalence of tax avoidance and employment rights violations within the sector.

As previously detailed by Computer Weekly, the UK government launched a three-month consultation in November 2021, concerned with helping it get to grips with the inner workings of the presently unregulated umbrella market.

This was on the back of numerous complaints made by contracting market stakeholders and individual contractors about non-compliant umbrella companies acting as fronts for tax avoidance schemes, and reports of employees engaged through these firms missing out on holiday pay entitlements, for example.

The government has now published two documents in excess of 50 pages long on the back of this initial consultation, which concluded in February 2022. The reports respectively detail the summary of responses it received and the actions it is proposing to take to eradicate bad practices from the sector.

The initial consultation, overseen by HM Treasury, HM Revenue & Customs, and the Department for Business & Trade, garnered a total of 400 responses, with the vast majority (354) coming from individual contractors who have experience of being employed through umbrella companies.  

As detailed in the summary of responses document, the government said it was clear respondents were in favour of umbrella company regulation, and said it would “continue to focus on addressing both the tax and employment law non-compliant behaviour in the umbrella company market”.

Part of this focus includes the launch of a follow-up consultation, which will remain open until 29 August 2023, on how best to go about regulating the market.

“As well as including strategic options to address tax non-compliance, the consultation will invite views on a proposed approach to defining umbrella companies for the purposes of employment law regulation,” the summary responses document stated.

Two-step process

Getting the ball rolling on regulation will be a two-step process, as the government would first need to define what an umbrella company is in law before giving government ministers powers to make regulations that contain requirements for umbrella companies, the document stated.

The government has put forward two options for covering off the first part of the process, with option one seeing umbrella companies defined as “a person or business who may be engaged as a corporate work-seeker by the employment business to employ or engage an individual looking for work,” it said.

“The umbrella company would employ or engage that individual with a view to them being supplied to carry out work for a hirer, in line with arrangements between an employment business and a hirer.”

Alongside this, the government is also proposing taking steps to simplify payment arrangements in the recruitment sector.  

“The industry has waited over a year to hear this response, and it is clear that some detailed work is required to consider all the options and identify the most appropriate way forward”
Crawford Temple, Professional Passport

“[This step] seeks to limit the ways individuals can be engaged and paid in the recruitment sector to one of four methods, one of which will be an umbrella company arrangement,” the document stated.

“The government considers that this could be beneficial to tackling pay-related detriments, such as where workers do not receive their pay or holiday pay, which are the main reported issues, as well as avoiding unnecessarily long contractual chains.”

An alternative option to defining umbrella companies involves setting three tests, all of which must be met for a business to be considered an umbrella company.

“An advantage of this is that it would enable government to be very precise about the businesses to be brought in scope and offer a clear way of targeting the subsequent regulations or standards to the right business at the right point in the supply chain.

“The definition of an umbrella company [in this scenario] would be based on two main components,” the document stated. “First, the umbrella company would have a direct contractual relationship with the individual who is supplied to carry out the work and a separate supply agreement with the employment business.

“Second, the umbrella company receives a total gross amount, which includes sums to cover their employer costs and the individual’s gross income, from the employment business. They pass the individual their net pay, after making all necessary and agreed deductions.”

Intention setting 

The consultation document also sets out the government’s intentions around umbrella companies, which include delivering improved outcomes for umbrella company workers, eradicating tax losses through non-compliance and levelling the playing field for firms in the sector.

“Together, these will enable both people and businesses to succeed in the labour market, supporting economic growth and ensuring everybody feels its benefits,” the document stated.

The amount of time it has taken the government to publish its response to the consultation has seen it come in for repeated criticism from various contracting market stakeholders in the 16 months since the consultation period closed.

Computer Weekly contacted the HM Treasury press office to see if it could shed any light on why the government response took so long to see the light of day, and received the following statement in response.

“We carefully considered the evidence provided by over 400 respondents to the Call for Evidence, so it is right that we launch a consultation to continue this important dialogue between the government and stakeholders, and to enable the government to make informed and effective decisions on any potential policy options,” an HM Treasury spokesperson said. 

What are umbrella companies?

Umbrella companies are frequently used by recruitment agencies and end-clients to run the payroll procedures for any contractors and freelance workers they engage.

The number of contractors who provide services to end-clients through umbrella companies is thought to have soared in recent years, following the introduction of changes to the IR35 tax-avoidance rules in both the public and private sector.

Under the reworked rules, the end-clients are now responsible for determining how the freelance workers they engage should be taxed, whereas previously this was the responsibility of the contractors themselves.

In response to these changes, Computer Weekly has unearthed numerous examples of private and public sector organisations that have introduced hiring bans that mean only contractors that work via umbrella companies can be engaged by their organisations.

This is because the contractor is considered the umbrella’s employee in this setup, which means the end-client is no longer responsible for determining how the contractor should be taxed.

Neil Carberry, CEO of the Recruitment & Employment Confederation (REC), said the regulation of umbrella companies is long overdue, given the government first committed to doing it in 2018, but news of the consultation “represents progress”.

He said: “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.”

Among the entities that audit umbrella companies to assess their compliance is Professional Passport, whose CEO Crawford Temple made reference to the length of time it has taken the government to deliver feedback on its November 2021 consultation.

“The industry has waited over a year to hear this response, and it is clear that some detailed work is required to consider all the options and identify the most appropriate way forward,” he said.

“The consultation the government has released in tandem with [the] response is more encouraging and positive and suggests that the government is keen to adopt a new approach and intends to raise the bar across the industry.”

He added: “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.”

“There are plenty of recommendations being put forward, but very little action. The reality is, the longer the government sits on its hands, the more problems it creates”
Julia Kermode, PayePass

Rebecca Seeley Harris, a former senior policy advisor to the Office of Tax Simplification, gifted the government a co-written roadmap to umbrella market regulation in May 2021, and told Computer Weekly that while she welcomes the government’s response, there is still a long way to go before it will be possible to put into force what it is proposing.

“Firstly, there will need to be primary legislation to define what an umbrella company is, and then secondary legislation to set out exactly how the umbrella company sector is going to be regulated. In between the primary and secondary legislation will be another, more specific, consultation,” she said.

“The government has stated that it does not intend to ban umbrella companies, but it seems that some of the proposals will effectively make them redundant.”

She added: “What is good, though, is that the government has decided to look at this problem holistically. It will be looking at the labour supply chain as a whole and considering what level of responsibility each party should play.”

Julia Kermode, CEO of payroll auditing company PayePass, greeted news of the consultation with similar caution, and acknowledged that it contains some “valid proposals” that will need a lot of work to get them over the line.

“The government is putting forward ideas that need real work and threaten how the wider recruitment sector operates,” she said. “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 the government sits on its hands, the more problems it creates.”

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