‘Undeniably crucial’ umbrella company consultation misses the mark with both advisers and contractors

Umbrella companies and contractor experts are in the final throes of replying to the government’s consultation on ‘tackling non-compliance’ in the brolly sector.  

It closes on August 29 and responses can be emailed to: [email protected].

But except for it signalling the government’s willingness to finally regulate, following what IPSE criticises as a ‘one-and-a-half-year wait,’ support for its proposals is scant.  

'More problems than solutions'

The contractor body was speaking this week, and said talks between officials and industry on the consultation’s proposals have thrown up “more problems than solutions.”

A contract tech manager (the sort of worker it’s hoped will benefit most from brollies being regulated), says the inaction is linked to the inadequacy of the three main proposals.

The manager, Robin Collier said: “We all would be a sight further on with it, if HMRC had begun this process a considerable time ago.”

'Not always the case'

But the bigger problem is how entrenched with employment businesses the belated bid to regulate umbrellas is, according to Workwell’s Chris James.

An accounting expert, Mr James observed that all the government’s three “strategic options for preventing tax non-compliance within the umbrella company market,” feature agencies.

But roping in recruiters further, the consultation tables two ‘umbrella company’ definitions, and these too “require a separate employment agency to be in the supply chain.”

“In reality [in the umbrella contractor supply chain], this is not always the case,” Mr James, Workwell’s head of limited company accounting continued in a statement to ContractorUK.

Further implying the proposals to be imprecisely targeted, he added: “As such [where an agency isn’t in the chain], this might allow for some kind of work-around. Or loophole”.

'Gaps in the umbrella consultation authors' thinking'

Bound to be unsurprised that the final framework to regulate brollies might contain a gaping hole is Lucy Smith, of Clarity Umbrella who met with officials to discuss the proposals.

Following her roundtable meeting with HMRC and HM Treasury last month, Smith revealed: “I do genuinely think they need a bit of guidance, as there is still gaps in their thinking.

“I think highlighting the ramifications that some of their actions may have [is worthwhile because as proposed, those actions] will not provide the required outcome.”

'Clamping down on umbrella companies'

HMRC would likely argue back that it asking more than 50 questions in the consultation is proof of just how determined it is to arrive at the correct outcome.

Indeed, one of its former inspectors has told ContractorUK exactly that.

“In lieu of the seemingly dropped Single Enforcement Body, there’s clearly a joint initiative underway aimed at cleaning up and clamping down on umbrella companies.

“The 52 questions in the consultation are aimed at helping the government to understand the sector,” said the ex-tax official, Carolyn Walsh. “And to ‘get it right’ this time.”

'HMRC weren't interested in listening'

Also formerly of the tax authority is Graham Webber, who says the taxman does have a history of hearing from the contractor sector but not listening.

“I recall going to something similar a few years back over IR35”, began Mr Webber, now of WTT Consulting, and referring to the roundtable meetings tied to the brolly consultation.

“That session was packed and all the umbrella providers…[ended up] predicting pretty much what [has] actually [since] happened.

“But HMRC had already made up their minds. And they were not interested in listening, responding, or taking on board any criticism of a plan that was a ‘done deal.’”

'Rankin v Giant case could spur the government on'

Moreover, a new employment tribunal case might encourage officials to make up their minds even faster, to launch regulation sooner (although the consultation fails to float a start date).

“In the case of Mr J Rankin V Giant Professional Ltd, there was a claim by the contractor, Rankin, for non-payment of wages,” Lawspeed’s Adrian Marlowe told ContractorUK.

“[While the claim was dismissed, this July 2023 case] doesn’t help umbrellas companies’ reputation. And it could spur the government on further in its desire to regulate umbrellas.”

'Compliant umbrella company registration scheme'

Also chair of the Association of Recruitment Consultancies, Mr Marlowe can be added to the list of umbrella consultation respondents whose backing isn’t primarily for the government’s three agency-centric proposals.

Far better, the recruitment lawyer says, would be for the government’s Employment Agency Standards Inspectorate to fund a ‘compliant umbrella company registration scheme.’

Marlowe is inviting feedback on his idea for such a scheme, both positive and negative and wants potentially affected parties to get in touch.

'HMRC should take a look at agency legislation'

At Oblako Ltd, where ex-tax officer Ms Walsh is a director, there was immediate agreement yesterday that the government’s existing framework offers more answers than the consultation’s.

“The Revenue is wondering whether agencies should be deemed to be the employer for tax purposes, and therefore liable for the PAYE due on agency worker’s income,” Walsh began.

“Well, I would say HMRC should take a look at Agency Legislation, chapter 7 ITEPA – under which agencies are already liable for the PAYE due unless another employer is involved, or the income is subject to deduction under PAYE before the legislation is considered.

“So today, if an umbrella company is not acting in the capacity of an employer, for tax purposes, the agency remains liable. If an employer is not operating PAYE properly, it’s unlikely to be providing proper employment rights either.

“Therefore, HMRC has the power to go after the agency using existing legislation. Why are they reinventing the wheel? There seems to be no need.”

'Complete lack of enforcement'

Fresh from his umbrella consultation roundtable meeting with officials, Orca Pay Group’s Robert Sharp agrees that underusing powers already on the statute book is a massive waste.

It’s even part of the reason for the mess today. “The whole problem has been enforcement or should I say, the complete lack of it,” Mr Sharp, Orca’s CEO told ContractorUK.

He added: “The easy road for HMRC is, has and will always be to pursue the contractor for the unpaid liabilities. The Revenue is also able to make much more money doing it this way as well, with additional interest, and penalties.

“While I do believe if you look at where HMRC were two years ago, there has been a huge improvement in terms of HMRC guidance, policies and their all-round understanding, the increase in avoidance schemes currently being promoted is at an all-time high in my opinion. 

“And given the current economic circumstances, it is perhaps easy to understand. But despite the increase in guidance, policies, and rhetoric from HMRC, the ship is still sinking -- and that is due to the lack of enforcement.”

'Too little, too late'

Sharp’s assessment doesn’t position him as much of a fan of the government’s three key proposals to regulate umbrellas, yet real-time, automated compliance solutions provider SafeRec yesterday hinted that the industry might need to take what it’s given.

“Every day, I hear industry voices claiming that the government's call for evidence and consultation is a case of too little, too late,” SafeRec’s Sebastian Sauca told ContractorUK.

“While I can empathise with this sentiment to some degree, it's crucial for the industry to recognise the direction the government is headed towards.

“From my perspective, their grasp of the umbrella industry has markedly improved compared to what it was three or four years ago, and that progress should be acknowledged.

“[But] the pressing challenge ahead for the government lies in devising an efficient enforcement strategy, focused on tax implications.”

'Undeniably crucial'

The compliance solutions provider’s boss, Mr Sauca went as far as to describe umbrella company regulation as “undeniably crucial.”

“[However] it won't be a panacea,” he cautioned. “Issues persist even in employment types that are currently regulated.

“[But looking at the consultation and the likely] direction the government might pursue, it will almost certainly amplify the onus on recruitment agencies -- and the supply chain.”

Not keen at looking a gift horse in the mouth is John Whelan, the chief executive of My Digital.

'Regulation is often not the Holy Grail hoped for'

Taking to LinkedIn after his company this week submitted a 25-page document in reply to the umbrella consultation, Whelan wrote: “It should be apparent to anyone who has operated in the temporary labour sector over the last 25 years that there are often significant unintended consequences when legislation is drafted, and regulation is often not the Holy Grail hoped for.

“[But] our response is vehement support for the umbrella payroll industry… and, despite the unpleasantness of ‘debt transfer’ as a principle, we reluctantly accept in our response that debt transfer is inevitable.

“We respectfully suggest that debt transfer is extended to end-clients as well as recruitment agencies, where ‘tax promoters’ are involved, so that future labour supply procurements are not predominantly price-driven -- which is often an indirect cause of aggressive tax avoidance.”

'Nowhere to be found'

In his post, Whelan also said he hoped “sincerely” that those who have “vociferously campaigned” for umbrella regulation have gone forward with responses to the consultation.

The My Digital CEO was expressing his hope in wake of another online post stating that “some who champion” umbrella regulation are “nowhere to be found” when “push comes to shove.”

Unfortunately last night, workers, those who actually use umbrella companies -- so umbrella contractors -- were in the frame.

“[Today] I met with HMRC, the Department for Business and Trade and HM Treasury…to talk about the consultation on ‘Tackling tax avoidance in the umbrella company market.’ The feedback I'm getting is that the workers are not getting involved,” reflected ReLegal Consulting founder Rebecca Seeley Harris.

Co-founder of the Fair Umbrella Campaign, Seeley Harris added: “It may be that umbrella company workers are going to feedback to the consultation on paper. But, if anyone wants to give feedback via me, I'm happy to add it to my [consultation] response. That is regardless of whether you are an employment business [worker], an umbrella company [employee], or a [contract] worker. Even if it's just to answer one question [out of the 52 posed], specific details still really help.”