Upsetting the contractor apple cart is the upshot of the government's unwieldy umbrella company consultation

The government’s still-live consultation on regulation of the umbrella market follows poor treatment of umbrella contractors around payment terms, rates, skimming and holiday pay entitlement, all loudly reported in recent months -- by this website and others -- leading to a siren call for regulation.

But with unpaid tax, poor treatment of umbrella workers, and the use of mini-umbrella companies as the consultation’s subject matter, writes Adrian Marlowe, chairman of the Association of Recruitment Consultancies (ARC) and CEO of recruitment law firm Lawspeed, is the consultation on the money?

The spotlight is on agencies as much as umbrellas

Recruiters feature in the consultation heavily. And agencies do engage with umbrella companies for a number of reasons; to reduce admin, cost, and risk of employment rights claims against hirers and themselves.

Umbrella companies take on the employment rights and absorb admin and cost through economies of scale, making their offering beneficial to agencies.

In addition, umbrella employers offer a single payroll point regardless of the different agencies a contractor works through, thereby supporting contractor applications for credit and mortgages. Some brollies even offer access to other services and benefits at discounted price -- benefits that agencies with lower scale generally cannot provide.

Not a problem for agencies is a problem for contractors

Further helpfully, unpaid levels of tax by defaulting or non-compliant umbrella employers is not currently a problem for agencies, unless they are not applying PAYE or where the umbrella lets down its contractors. Yet such non-compliance is a problem for contractors who sometimes end up with a HMRC demand, and it is this specific aspect which appears to be the principle thrust of the consultation.

Outlined by HM Treasury as ‘option one,’ the consultation proposes that agencies should undertake due diligence of the umbrella company with penalties for not doing so properly. It also suggests (as ‘option two’) that agencies should be liable for any unpaid tax of the umbrella regardless of any fault of the agency. It even goes so far as to propose that agencies should be regarded as the deemed employer of the agency worker for tax purposes, so forcing the agency to pay the employment taxes despite the umbrella being the employer (‘option three’).

Shifting responsibility, it's nothing new

Just as under IR35, the whole concept here appears to be to shift responsibility for the tax burden of the ‘other party’ to the agencies. Under IR35, that party is the contractor, under these proposals it’s the umbrella company -- but there is a key difference in context.

After an assessment of the role, agencies can absorb inside IR35 arrangements by paying by PAYE or engaging with an umbrella. Alternatively they can continue to work with outside IR35 arrangements. In contrast, where working with an umbrella company, under these proposals, there are no circumstances in which the agency could avoid risk of penalties and liability, should the umbrella company fail to pay all taxes to HMRC.

Let’s take a real-world example. In the Exchequer Solutions Ltd case, the tax shortfall was a reported £11million, due to incorrect expenses processing. Well, what agency would want to face that kind of debt-transfer when it has no control whatsoever over the behaviour of the umbrella company?

The consultation does mention “safeguards”, but no detail has been given. And potential liability may continue for a long time (six years perhaps) after a supply has ended.

Upsetting the apple cart -- or outright obliterating it

So the concept of the proposals is therefore flawed. In their current form these plans by HM Treasury and the consultation authors are likely not only to upset the apple cart – but to obliterate it. The outcome, therefore, could be the demise of the umbrella industry, leaving contractors without the benefits I mentioned at the outset.

Elsewhere in the consultation, the plan to introduce measures to protect umbrella workers are a bit like the tax-related proposals -- as the ideas on worker pay reveal real practical difficulties. For example, if ‘pay when paid’ clauses are ruled out, so the umbrella always has to pay the worker regardless of payment by the agency, and the agency goes bust, all the umbrella workers could lose out as the umbrella itself may fold.

Further concerns

Also, on general principles given that all employees have the same employment rights -- would it be right to give one sector enhanced rights over another?

Lastly, the proposed methods for HMRC to address “fraudulent” mini-umbrellas claiming flat rate VAT and NIC allowances designed for startup companies is surely a matter for government. While stopping these companies is likely a priority, it’s not clear how contractors or agencies can assist, if at all? Defining this type of organisation is key, and as fraud is a criminal offence, surely we should expect to see some prosecutions of the organisers? I’m not convinced this is an issue for this consultation, which already has its work cut out.

In my view, the government’s proposals to regulate the umbrella market do not achieve the right balance. They will reduce choice and flexibility, and are wide of the mark for everyone save HMRC. Proper regulation of the umbrella market is welcome -- some activities should clearly be addressed, but not if the result is wholesale destruction of the marketplace. Other better targeted options could work more efficiently. For example, an EAS-controlled and self-funded registration scheme for compliant umbrella companies, addressing transparency and behavioural requirements, could save cost, rule out non-compliant operators, level the playing field, protect against tax loss, and protect umbrella workers all at the same time, with little downside for contractors or agencies.

Finally, please come forward

If this idea resonates with you, or you’d like to give me your feedback on any other points raised in this article, please do so as it may assist ARC in our forthcoming response to the consultation, which closes on August 29th.