Umbrella companies in 2023: what’s in store for contractor payroll firms

What will be the big headline for contractor umbrella companies in 2023?

The smart money in 2023 has to be on the government imposing regulation on umbrella companies -- “at last,” according to Chris Bryce, of the Freelancer & Contractor Services Association.

Despite him once being indirectly warned that the government’s response to the Treasury’s November 2021 call for evidence on brollies will make “brutal reading” for his FCSA, Bryce said last night that he regards regulation as “overdue.”

He also clarified that, whether it’s by the mooted Single Enforcement Body or another means, regulation of umbrellas is something that his association “has long advocated for.”

But it’s not lost on the former contractor, now the FCSA’s CEO, that the government only very recently turned down the opportunity to bring what he calls, “appropriate” legislation forward (by dropping the employment bill).

Are there risks with umbrella companies likely being regulated in 2023?

One accreditation boss’s ‘appropriate’ could be another accreditation’s boss’s ‘inadequate’ however.

That’s because while Professional Passport is similarly conscious that nine months of inactivity from the Treasury has ensued since it closed its evidence-call, the organisation wants the legislation to cover ‘schemes’ too, not just umbrella companies.

“The umbrella sector harbours models that are causing harm to people’s pockets…[and] these models purport to be genuine umbrellas but are tax avoidance and disguised remuneration schemes”, said Professional Passport’s Crawford Temple.

“The government needs to tackle the dodgy schemes that are capitalising on people’s financial hardship as a matter of urgency. Enforcement is key.”

Temple’s final three words are a clue that he might be satisfied if HMRC or even BEIS simply stepped up their usage of their existing powers. As long as “the architects of these schemes” get stung, maybe new legislation isn’t the answer.

Graham Webber of WTT Consulting has long-said there’s no ‘maybe’ about it. In particular, he argues that HMRC getting to lay down the law for umbrella companies would result in the ‘tax tail wagging the commercial dog.’  

Lucy Smith, managing director of Clarity Umbrella, sounds like she’s willing to roll the dice.

“In 2023, it would be nice to see the government seriously think about regulation in the sector, as they promised,” she says.

If not umbrella company regulation in 2023, then what else; more of the same?

SAW Consulting believes you only need to look at the reaction to recent allegations against a few high-profile umbrella companies, to realise that a bit of a movement has started.

“Payslip skimming and holiday entitlement [were just] two of the hot topics for umbrellas in 2022, and I suspect these won’t go away in 2023,” says SAW’s founder Shelley Ankers-Wainwright.

“So while I have no doubt that umbrella companies will continue to be in the spotlight for all the wrong reasons…we will see more [of them, overall,] engage third-party independent payslip-checking software, [resulting in] increased visibility.”

That increased visibility will, in turn, “raise awareness among contractors” about which provider does what in the brolly sector. Individual brollies will almost be categorised ‘compliant;’ ‘non-compliant’ or ‘somewhere in between.’

And, adds Ankers-Wainwright, that will happen even though software – on its own -- isn’t a silver bullet.

“In the absence of regulation, [that software will likely come into its own] alongside FCSA and Professional Passport [accreditation],” she predicts.

That latter organisation’s boss agrees that a sea-change occurred in recent months.

Mr Temple said: “In the latter part of 2022, we saw more transparency around non-compliance as a few umbrella providers were called out for covert behaviour. 

“Such morally indefensible acts should serve to put even more pressure on the industry to clean up its act. Transparency is key and I would expect and like to see more transparency in the sector in the coming year”.

Why self-regulation of umbrella companies at all; is it because brollies are here to stay?

Unless the widely-sought-regulation spells their end, umbrella companies aren’t going anywhere, despite the efforts of the TUC and once upon time, the Labour Party.

Russel Upton, director of key accounts at Parasol, believes umbrella companies’ staying power tangibly increased “on the back of the Autumn Statement 2022,” which contained a raft of anti-limited company tax measures.

Even more revitalising for the umbrella company model? Also something that chancellor Jeremy Hunt did – his calling time on the IR35 “hokey cokey,” as Upton described it.

The Parasol director was referring to IR35 reform, which makes risk-adverse engagers insist on umbrellas, being reinstated in October by the chancellor, effectively overruling his predecessor’s move to repeal it.

IR35 reform reinstatement is all that has given umbrellas a new lease of life for 2023, is it?

No, the state of the economy has too.

But IR35 reform being refired has to be a bigger elixir for umbrellas – assuming not all clients will be ‘awoken from their risk-adverse slumber’ (as an IR35 expert recently put it, here).

At the FCSA, Mr Bryce reflected: “For contractors, the off-payroll regime looks like it’s here to stay, meaning more and more end-users will require that they go on a payroll”.

He added that during an economic downturn, the UK tends to experience an “upturn in the use of temporary workers and this, as well as the IR35 rules probably means the continued growth of umbrella usage.”

So it’s umbrella companies all the way in 2023 for, then?

Unlikely, according to Upton, who believes offering contractors a choice of contracting structure will be the key.

“Plenty of our umbrella contractors….want the flexibility to choose the best option for them – often depending on the IR35 status of the assignment,” the Parasol director says.

As to when to offer that choice, and why, it might require a bit of swotting up – even for the umbrella company.

“[Us offering] help on the variety of solutions available is becoming a key part of our role,” Upton said. “[But] there is a lot of education that needs to be done [generally]. And we're working hard with contractors and our agency partners to ensure compliance is at the heart of everything we do.”

What else about umbrella company compliance in 2023?

“One thing I can be certain of [next year] is that FCSA will be at the forefront of assuring best-practice in the industry,” says a similarly-focused Mr Bryce.

He added that, far from resting on its laurels, the association will be “constantly enhancing” its codes in 2023.

To further ensure contractors can be ‘served well’ by umbrellas showing “FCSA accredited,” Bryce also spoke of the need to improve member assessment processes, reporting options, and “digital verification”.

Wouldn’t contractors prefer action on Preferred Supplier Lists (PSLs)?

Probably, and pushback is surely incoming on PSLs in 2023, according to Clarity Umbrella, potentially in a more coordinated way than the individual, isolated cases seen so far.

“Contractors seem to be being even more cautious about who they choose [to be their umbrella company employer], given the industry ‘activity’ that has been banded across the internet,” said Ms Smith, referring to allegations of late.

She added: “But at the same time, we are seeing agencies start to close their PSLs, and limit the contractors to their chosen brollies. I think there are going to be some interesting times in 2023, as contractors try to push back!”

The hope at SAW Consulting is for less need for pushback, and more focus on the customer.

Ms Ankers-Wainwright explained: “I would like to see more of a positive step around PSLs, which have also been in the spotlight this year.

“There is still too much emphasis on referral fees and lining the pockets of the recruitment agencies, than there is around service and compliance, and putting the contractor first.”