Officials want umbrella sector evidence: here’s what our brolly will say

Nearly 25 years on from the inception of the umbrella company as an employment structure, the government has belatedly decided that it may be wise to look at regulation for the umbrella market, writes Lucy Smith, managing director of Clarity Umbrella.

But it is a crying shame that it took something as divisive and damaging as the still-unwieldy changes to IR35 to bring about this scrutiny. The April 2021 reforms have already led to a surge in ‘umbrella companies’ and the avoidance schemes of these companies which claim to be umbrellas but aren’t actually bonafide, compliant brollies.

Leaving behind the disjointed, hopefully

Being asked by the government to give evidence on my sector is a bit of a philosophical exercise for me. When I look back over the last 10 years of the industry, I see many changes to the market. What strikes me is the way in which (genuine) umbrella companies have had to operate, adapt and invest in accordance with what feels like almost every single Budget announcement.

That said, it has felt like the umbrella market received a respite for a few years. So this Call for Evidence from HMRC, HM Treasury and BEIS should be a welcome relief to those in the industry who have been working historically, often tirelessly, within very disjointed guidelines.

Laying a path through the minefield

What I keep asking myself since the Call for Evidence was announced last month is this. After years of trying to sit employment law and tax law alongside one another, is this now a chance for potential clarity? Can we clear a path through this minefield, for both bonafide umbrella companies and hard-working umbrella contractors alike?

Positively, the 40-page document reads as if someone in Whitehall has finally done some actual research on umbrellas. The commentary from the government, particularly in the document’s Chapters 1 and 2, at last reflects the reality of what is happening in the umbrella market and contractor sector right now.

Umbrellas not prioritised

Delving further into the document (specifically at 1.15), it is interesting to note that officials want evidence from umbrellas, employment businesses, workers and end clients. But none of the questions out of the 38 questions posed are specifically directed to those who are at the forefront of the brolly market – the umbrellas themselves. Hopefully, the omission of this helpful detail won’t stop many of the genuine players on the employing side of the fence from having their say. And yes, we will definitely be among them!

So what do we think? There are many things we want the government to consider. Chief among them is clarification over the treatment of umbrella company holiday pay; follows-ups and procedures on ‘due diligence,’ the HMRC reporting requirements (effective since August 2015), and Key Information Documents, including how KIDS should be used (but aren’t).

Workers did (and do) choose umbrellas of their own free will

Umbrella companies were established as an alternative to operating via a limited company (a Personal Service Company). And contrary to today’s popular belief, it should be recognised that there were and still are individuals who simply choose, of their own volition, to operate via an umbrella company rather than their own PSC. But as legislative changes have been brought in over the years; ranging from IR35 reform in the public sector in 2017 and changes to relief on expenses due to the ‘SDC’ rule, to the Apprenticeship Levy and beyond, many, many individuals have been forced down the umbrella route. These are individuals who, some 20 years ago, would always have been defined as ‘agency workers’ and offered straight forward PAYE via a recruitment agency.

Over the period, many new recruiters emerged and would use umbrella companies as a means of paying the worker without their employment business having to take on any employment responsibilities. Having worked with the Low Incomes Tax Reform Group on a number of explanatory documents, it is nice for me – as the owner-director of genuine PAYE umbrella -- to finally see the government now question whether there are scenarios when an umbrella company may not be an appropriate model for workers. Like the Call for Evidence itself, this consideration is not before time, but it’s still very welcome nonetheless.

Regulation: the key

The elephant in the room of course is the widely-sought regulation of umbrella companies. The government document positions regulation as something that’s going to happen, in addition to, or informed by, whatever the Call for Evidence concludes. In particular, officials say:

‘This Call for Evidence is intended to complement the government’s commitment
to bring umbrella companies into scope for labour market enforcement.’

The key is that regulation of the market must be beneficial to those who want to operate on a level-playing field. There is too much disparity between companies; the bonafide battling against those who are offering avoidance schemes; those marketing themselves as umbrella companies but operating as ‘mini umbrella companies’ behind the scenes; closed PSLs; those umbrellas with accreditation, those umbrellas without. And I could go on!

KID rules?

Related, the government has introduced Key Information Documents. Well, KIDs are a great idea. But it may be worth BEIS, HMT or HMRC considering the introduction of new rules that would cover the provision of such a breakdown from every umbrella prior to engagement or signing of contracts. Employment businesses are not currently in a position to be able to provide KIDS competently, and as such are simply (wrongly) providing sample KIDs to contractors. These samples really are of little use to anyone, especially when you consider one worker might be on £120 per day and another on £1,200 per day! My view is that the umbrella company is better positioned (for any engagement through an agency) to make the take-home pay breakdown more tailored to the individual’s requirements.

As I mentioned earlier, holiday pay also needs addressing. How it is operated, what details of holiday pay are to be relayed by umbrella to worker; and how holiday pay should be shown. And ideally, this trio needs to be uniform or at least, the umbrella industry needs specific rules so that there is no disparity. The government needs to arrive at a position whereby BEIS can say, ‘When you operate via an umbrella company this is what you get on holiday pay. No Ifs, Buts or Maybes. End of.’

The closed club

Finally, standing back from it all (as I try to do at the end of a working day!), it’s plain but nonetheless jarring to see that there is unfortunately a monopoly in the umbrella market and it’s a monopoly that’s increased even more since the IR35 revisions of April. This monopoly provides little room for entry for newcomers trying to operate compliantly, and this ‘closed club’ needs to change. Restrictive PSLs reduce the level-playing field further.

And although BEIS has stated in the past that such a B2B arrangement is one that can be restricted, is it equally fine to accept that, in the UK in 2022, an employment business is still going to be able to force a worker into employment with a company they have absolutely no wish to be employed by?

Final thought

As I’m sure you can see, there’s still a long way to go to get umbrella company working right, and a fair bit of work to done. But the signs are that this Call for Evidence is from a place of knowledge; let’s hope we can all give to the government the information it needs to make this a fairer, less unsafe, more compliant industry.