Government finally publishes umbrella company regulation plans

The government has tabled three options as part of its “inordinately delayed” response to contractor sector feedback on HM Treasury’s umbrella company market evidence-call.

The first option, based on the views which HMT called for back in November 2021, to is to introduce a mandatory “due diligence” requirement on employment businesses or end-users.

The second option is to legislate to grant HMRC the power to collect an umbrella company’s tax debt from another business in the contractual chain, akin to MSC debt transfer provisions.

Option three and piling even more onto contractors’ agencies, is to deem the employment business supplying the contractor to the end-client as the “employer for tax purposes.”

'Preventing tax non-compliance within the umbrella company market'

All three options stem from the evidence-call’s 400 respondents (354 were workers), and are aimed at “preventing tax non-compliance within the umbrella company market”, says HMT.

Shy of regulating umbrella companies directly, this prevention will result from the options “changing the incentives and behaviours in the temporary labour market,” officials add.

Contractor Voice is surprised the government managed get any options on the table at all, as the information which the trio has been drafted in response to is almost a year-and-a-half old.

A lobbyist on contractor holiday pay, Contractor Voice was referring to HMT launching the evidence-call in Nov 2021, closing it in Feb 2022, but only replying to responses yesterday.

'Inordinate delay'

“This 15-month, inordinate delay by the government in replying has prolonged malpractice”, says the lobbyist’s Jacob Bellas. “And much of it exposes contractors to monetary losses.”  

On behalf of contractors yesterday, freelance body IPSE confirmed a feeling of relief that finally, the government appears to be taking action. 

“We are relieved to see a consultation document has been published at long last,” IPSE’s Andy Chamberlain told ContractorUK.

“First impressions are that the government is focusing on the right areas… but that much of it hinges on accurately defining what an umbrella company is.”

'Tackling non-compliance in the umbrella company market'

In the 58-page consultation, 'Tacking non-compliance in the umbrella company market,' the government outlines two options to define umbrella companies in law.

Option one is to define an umbrella company as a worker-supplying entity; introducing “an element of regulation” and limiting to four models how brollies pay and engage workers.

Option two is to define umbrella via three tests, all of which would need to be met to be a brolly (so payroll providers would be unaffected), but with pay and engagement unrestricted.

'Very little action'

“The government is putting forward ideas which need real work,” says PayePass chief executive Julia Kermode, acknowledging the size of the consultation’s ask.

“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.”

'Waste of print'

A former HMRC official is even more critical, not because the government has made the sector wait unduly before lumbering it with the time-consuming tasks of defining an umbrella company -- but because there is one problem it touches on but just won’t address.

“The opening line of the [consultation] document summarises the problem and the fact that without solving it, everything else in this document is a waste of print,”, began the ex-tax official Graham Webber.

“[That line states] ‘The purpose of this consultation is to seek views on proposals to tackle non-compliance with both tax and employment rights by umbrella companies.’” 

'Comprehensive'

Now of HMRC dispute advisory WTT Group, Mr Webber reflected: “Even if the purpose of the consultation was to produce a better and more defined umbrella operation, there remains the problem that ‘employment’ and ‘employee’ and ‘employer’ mean different things for tax and employment law purposes.

“[So the consultation] links the two, but government remains steadfast in saying that there will not be a common definition or common legal analysis. Until we do have a joint-definition, achieving a position which satisfies both tax and employment law, is a pipe dream.”

But after waiting so long for the government to come forward on umbrella companies – with its inaction part inspiring The Fair Umbrella Campaign which she co-founded, a tax lawyer is happy that at least one nettle is finally getting officially grasped.

“From what I have read, this is a very comprehensive consultation covering both employment rights and tax,” the lawyer, Rebecca Seeley Harris said last night to ContractorUK.

“As a result of [receiving views from every part of the labour supply chain], the government has decided to look at the issues holistically. This can only be a good thing.”

'Opportunity for much-needed clarity'

At The Association of Independent Professionals and the Self-Employed (IPSE), where Mr Chamberlain is policy director, a potential turning point is being recognised.

“[Regulating them] may be more complicated than it first seems… [but] there is an opportunity here to bring much needed clarity to the rules around umbrella companies,” he said.

Due to the weightiness of the government’s reply to responses to HMT’s market call (54 pages), and the even longer consultation containing the three regulatory options, most umbrellas are still studying the fine print.

'None of the three options appear to combat payslip skimming'

But Compass Contacting and Employment’s chief operating officer Alex Fraser already has a handle on the more than 50 questions which yesterday’s consultation wants answers to.

“Unfortunately, none of the three options outlined in the document would seem to be effective against the type of payslip skimming which hides lawful but morally suspect deductions from contractors’ income,” Mr Fraser told ContractorUK.

“More focus on a code of conduct type-approach is probably needed to tackle that. But subject to seeing how relevant and real-world the prescribed measures are, we are currently most in favour of option one -- ‘mandatory due diligence.’”

Compass’s COO explained: “Many medium and large agencies already have their own regular compliance audit frameworks, but there would be significant advantages for all parties in the supply chain if it was standardised.”

'Path of least resistance'

But it is option three, under which agencies would be an umbrella worker’s deemed employer, which is “most likely to be implemented,” according to IR35 procurement expert Mark Coulson.

“This would mirror the existing legislation at Chapter 7, Part 2 ITEPA,” he posted. “It’s the path of least resistance.

“Recruiters would be responsible for deductions of income tax and NI, and payment of Employer’s NICs, This would effectively eliminate the use-case for umbrellas, as they would merely become payroll companies.

“And in the event the client doesn’t use a recruiter, they [as the end-user] would be responsible for deductions of income tax and NI, and payment of their Employer’s NIC.”

'Likely that the assignment rate would no longer be advertised'

Director at Best Practice Procurement Ltd, Coulson last night took to LinkedIn to say it is also “likely” that agencies will no longer be allowed to advertise the ‘assignment rate.’

And, he claimed, agencies and umbrella will likely find they can no longer make it a condition of the assignment for the candidate to opt out of the Conduct Regulations.

Another ‘likely’ is that the Single Enforcement Body will stay on the shelf.

'Lot of compliance set to be put on agencies'

Reflecting on the body getting only three mentions in the consultation (one of which states the government “previously committed” to establishing the SEB), ReLegal’s Seeley Harris said:

“Having promised to create a Single Enforcement Body, it now looks like the government’s preferred overseer of operations would be the Employment Agencies Standards inspectorate.  

“And maybe that’s understandable, because there is a lot of compliance set to be put on the agency if [option three] happens, because agencies are already responsible as the ‘fee-payer’ under the IR35 off-payroll working rules.” 
 Under the third option,  a party further up the labour supply chain than the end-client would be required to operate PAYE.

The government says that while “this would not prevent the deemed employer from using a payroll bureau or umbrella company to discharge their PAYE obligations,” the deemed employer “would be ultimately responsible for ensuring the correct operation of PAYE.”

'The real question is when'

To Sebastian Sauca, SafeRec’s CEO, who writes today exclusively for ContractorUK, umbrella company regulation is a matter of ‘when’ not ‘if.’

“I do believe [regulation of brollies] is [now incoming]. The real question is when?” “[And while] new rules can be good, if there is nobody to enforce them, we might just end up in the same situation we're in.”

Open for responses until August 29, the consultation says “further action” to combat abuses in the umbrella market of the Flat Rate VAT and Employment Allowance schemes is being considered.

'Achingly slow'

“We should welcome the fact that ‘something’ has appeared [from the government on these issues and abuses] “ reflected WTT Group’s Mr Webber. “But I really hope the forecast remains fair because the pace of creating a compliant, useful, relevant and universally accepted umbrella is achingly slow.”

ReLegal Consulting agrees contractors wanting a speedy resolution to rogue umbrellas will be disappointed.

“It is going to take time to fully implement [the proposed regulation of umbrellas] because there will be a two-step process,” the law firm cautioned. “Firstly ‘umbrella company’ has to be defined in primary legislation and then the specific regulations will need to be consulted on after that -- before the secondary legislation is brought forward. So that will take some time but, at least the process has started.”