Contractors, here’s the government’s mealy-mouthed umbrella regulation update decoded

It says a lot that it’s not easy to remember precisely when the first discussion from the government began about regulating the umbrella company industry.

It was probably a bit before November 2021 when the government initially called for views, writes Lucy Smith, managing director of Clarity Umbrella.

But that now far back starting pistol goes some way to explaining why so much was riding on April 18th 2024; a date the government said at Spring Budget it would use to update contractors on umbrella regulation – regulation that was consulted on last summer but is (still) yet to receive a formal government response.

Another tumbleweed moment

Unfortunately, the update on Tax Administration and Maintenance Day turned into yet another tumbleweed moment for umbrellas from this government.

The long-anticipated response came on Thursday, in the form of a three-paragraph ‘holding page.’

Much more detail came way beforehand -- on July 24th 2023. Then, stakeholders were invited to attend a roundtable to discuss the best regulatory way forward with HMRC. From attending the meeting, I can tell you that refreshingly, the Revenue recognised that the issue was not simply that of out-and-out tax avoidance. The department also made clear that it knows the offerings of some umbrella companies were less than compliant.

Promise, understanding, and momentum

With the Treasury, and the business department (BEIS) vocally backing up counter avoidance officials, it was looking promising. Even if everyone in the room knew that there would be no quick fix, there was certainly momentum. One suggestion was to utilise the data which HMRC readily has to hand (chiefly umbrellas’ RTI records and info from the agency reporting requirements). To the majority in the room this sounded sensible, as it meant the tax office would have all the details that they would need to see if any money from umbrella employees had gone awry. So did this come to fruition?

Well, there is little we can take from the three-paragraph update to tell.

What positives can we take from the government’s brief brolly update?

But let’s take a moment to consider the few positives in an otherwise mealy-mouthed update.

We know that HMRC still has regulation on its agenda, as it says it “will publish a response to its consultation in due course”. So although it does seem a little like we’re all watching paint dry, let’s hope the department manages to push forward with a legislative blueprint before a change in government pushes back, pauses, or worse pulverises any progress that might have been made otherwise.

Another positive? The government states in the update that it wants to “support workers and businesses that use umbrella companies”.

But some may fear this positive contains a negative. Are they, for example, aiming ‘regulation’ to just be another educational initiative? A tool or similar to try and deter workers from looking solely at maximum take-home pay, to keep them away from avoidance schemes?

The sister of CEST?

The government update goes on to talk about an “online pay checking tool,” for release later this year.

On the plus side, us in the industry agree that there are so many anomalies in this area, so it’s good the government has got contractor payslips in its sights. Yet worryingly there is huge potential for such a tool to cause unnecessary work for those umbrella companies which are operating compliantly, notably in the instance that the government-built software returns a differing take-home figure.

Even us umbrellas are all painfully aware of the consensus about the IR35 status testing tool CEST (Check Employment Status for Tax).

So HMRC really does need to pull something special out of the hat. That’s especially vital when there are checkers online that already cover every aspect of a payslip-check, from monies in to monies out and all the parts in between.

‘Supporting businesses that work with umbrellas’

As for supporting “businesses” that work with umbrella companies, it seems the government’s solution is to “introduce a due diligence requirement to drive out bad actors from labour supply chains.”

Interestingly, at this time, there seems to be no mention of the debt transfer proposal.

But that’s not to say it still isn’t coming!

Rather, it appears this government’s main aim is to introduce a “statutory due diligence regime for businesses that use umbrella companies, and ensure it has the best understanding of the impacts that this could have on reducing non-compliance.”

An umpteenth chance for umbrella companies/ contractors to have their say

The last part is mystifying. They are cueing up yet another call to stakeholders to help them put this requirement together, which begs the question as to whether they actually know what ‘due diligence’ on umbrellas looks like, and how far they want to go with it?

Unfortunately despite the refreshing bit of that July roundtable, it begs another question; ‘Is this a question of taxes only?’ My guess is ‘Yes.’

Umbrella regulation is starting to smell like an HMRC tax avoidance mission

So regretfully I absolutely expect the government is now looking at umbrella regulation as being only about ensuring all taxes that are due to HMRC, are paid to HMRC. This is increasingly looking like a tax avoidance mission, rather than the regulation of umbrella companies.

It is a scaled down version of the July roundtable’s top suggestion. It might even be as straightforward as HMRC will see the monies into the agencies; then see the monies out of the umbrellas and if these don’t match? Then officials will spring into some sort of action, so HMRC can declare ‘job-done.’

Five must-includes in HMRC’s ‘due diligence’ guidance for umbrellas’ partners

My recommendation is that ‘due diligence’ for tax purposes in the form of HMRC guidance to those business (i.e. those businesses which engage with umbrellas), should have five key components as a minimum:  

1. The payslip checker -- assuming it stands up to scrutiny, and then stands up to the competition. As mentioned, tools already exist in a potentially more sophisticated form than what may be provided by HMRC.

2. Confirmation that all HMRC accounts are paid and up to date.

3. Confirmation that the contractual engagement is with a UK-based registered limited company.

4. Director checks via Companies House.

5. A recognised industry accreditation.

Finally, the Holy Grail be like…

But this is not simply a “guidance” exercise. Indeed, as legal adviser Rebecca Seeley Harris has recommended, the Holy Grail of umbrella regulation is actual legislation to back up the Revenue’s long overdue clean-up moves in this sector including its forthcoming guidance, to create an industry that is compliant and governed by statute.