The taxman’s bitty umbrella company market statement is more than meets the eye

Is HMRC kicking the umbrella company can down the road or does their Tax Administration and Maintenance (TAM) day statement actually tell us more than we might think?

Here, exclusively for ContractorUK, I will endeavour to answer this question, and explore the statement in more detail, writes Meredith McCammond, the LITRG’s technical tax officer.

What was said about umbrella regulation on TAM day 2024?

The announcement on April 18th 2024 only contained four items.

Industry reactions included that this was “underwhelming and disappointing” and “an anti-climax for the industry.”

The short announcement is in comparison to 23 measures last TAM day. The year before that, was equally comprehensive. However, TAM day only became a ‘thing’ in November 2021. Earlier, in March 2021, we had ‘Tax day,’ and before this, we simply had ‘L’ day (or draft ‘legislation’ day).

In some ways, this evolution reflects the fact that during this period, there have been five different Treasury ministers at the helm -- all with different approaches. And it is ministers who ultimately set the direction and priorities in tax policy and administration.

Nevertheless, this year’s TAM day was undoubtedly a bit disappointing, especially for contractors involved in umbrellas who were hoping April 18th would bring clarity and certainty for the sector.

Unrealistic expectations?

Looking back at Spring Budget 2024, the announcement (at paragraph 5.42) was that HMRC would “provide an update” at TAM day – not that it would provide a summary of responses/its own response to the consultation.

(Although to save you writing in to ContractorUK, we note that at Spring Budget paragraph 2.41, it states: “Following consultation in 2023, the government will set out next steps for tackling non-compliance in the umbrella company market shortly.” This statement admittedly feels a little more ambitious.)

In effect, an update is what we got.

There was a reaffirming of their commitment to the umbrella market; confirmation of an important new initiative and a development, in that they stated they are “minded” to introduce mandatory ‘due diligence’ to help clampdown on tax non-compliance. While the statement on umbrella companies was only three paragraphs long, there is more that can be drawn from it than is perhaps apparent on first glance.

Timeframes

In the first paragraph of the update, we are told that the government will publish a response to its consultation “in due course.” There is no reason to think that this will be later rather than sooner. Indeed last TAM day (April 27th 2023), HMRC made a similar announcement about the November 2021 call for evidence (which closed in February 2022). They went on to publish a summary of responses and a consultation on June 6th 2023.

This particular consultation only closed in August 2023. Even if it takes HMRC another three or six months to respond, then this will be a reasonable period in our experience. All in all, although not as quick as we might like, it does feel like consistent progress is being made.

Publication, new technology, confirmation  

In the second paragraph, we are told that HMRC will publish new guidance later this year, including an online pay checking tool to help umbrella company workers to check whether the correct deductions are being made from their pay. This is the first time HMRC has confirmed this will definitely go ahead.

If this is an ‘assignment rate to gross pay to net pay calculator,’ then this is a significant development. It would allow workers to ‘follow the money’ and give them complete visibility over how the umbrella company is dealing with their pay, including holiday pay. It will allow them to see how much should be deducted from the assignment rate for employment costs to spot skimming. It will provide them with valuable information about how their net pay is calculated that will help them detect things like disguised remuneration.

There is already a good calculator available in the marketplace which umbrella company contractors can use for free.

However an official tool on GOV.UK, is more likely to be perceived as reliable and trusted. If it is good, is well promoted by HMRC and stakeholders and becomes well used among workers, it could really contribute to clamping down on pay and tax abuses, pending a full response from HMRC and DBT (Department of Business and Trade).

Due diligence

Talking of DBT, while the mandatory due diligence direction of travel with regards to tax is set out in the final paragraph of the TAD day statement, we still have no information about how the government might regulate umbrellas from an employment law perspective.

It is important to remember that the consultation was a joint-consultation. Both ministers and departments need to be on the same page to bring forward the plans.

Getting mandatory due diligence right and introducing something workable and effective - but proportionate - is obviously going to be a massive balancing act and will take HMRC’s most advanced thinking. As such, we welcome the fact that HMRC wants to engage with the recruitment industry and other key stakeholders on the detail of the regime, which is also set out in the statement.  

Grounds for positivity

All in all, it feels to us that we have come a long way since we published our report on umbrella companies. Umbrella company working in a compliant, safe and viable way is an extremely important issue and it was always going to be a long, complex process. Despite this year’s TAM day announcements being thin on the ground, we remain positive about the outlook.