REC calls for bad umbrella company 'hotline' so contractors can help HMRC

A hotline to report dodgy umbrella companies should be set up by HMRC for contractors to ring up and ‘shop’ them to, an agency body says.

Whether acting in “bad faith” or being explicitly abusive, the brollies of concern to workers could be reported to the phoneline, says the Recruitment & Employment Confederation.

A channel dedicated to blowing the whistle on bad brollies would “make it easier…for government bodies to coordinate their efforts to stamp [them] out”, says REC’s chief executive Neil Carberry.

'Real change'

But a supporter of the Poyser-Seeley Harris draft policy to regulate umbrellas, Orca Pay Group, says a corner has already been turned, potentially suggesting a hotline isn’t necessary.

“Since HMRC released their guidance on supply chain due diligence, I have seen a real change in the focus of recruitment agencies and end-clients to understand the importance of this [-- brolly compliance]”, said Orca’s CEO Robert Sharp.

Before its new supply chain guidance on May 13th, HMRC also refreshed a part of its IR35 resources entitled ‘Working Through an Umbrella Company.’

'Mass HMRC enquiries'

In the eyes of law firm Chartergates, the “ramping up” of umbrella resources by HMRC signals that the previously mooted Single Enforcement Body is “very much on the agenda”.

“[This brings] with it the ability for HMRC -- or another government organ -- to instigate ‘mass’ holiday pay or NMW enquiries”, the firm warns.

“This will put umbrella companies under more intense scrutiny meaning compliance levels will need to be as high as they can be.

“While HMRC’s guidance is one-sided and technically ‘light’, it does give us an idea of what they believe is acceptable -- despite what the law may say, giving us a clue for the areas they will target in the future.”

'No legislation that defines umbrella company'

However what constitutes being ‘acceptable,’ even ‘compliant,’ isn’t uniform.

Posting to LinkedIn to say she hoped umbrellas working ‘compliantly’ would be supported, rather than legislated against, Clarity Umbrella’s Lucy Smith was told by a tax expert:

“The problem is defining ‘compliant.’ What does that actually mean? There is no legislation that defines umbrella behaviour or says what they should or should not [do]”, said the expert, Graham Webber.

The director of tax at WTT Consulting, Mr Webber explained: “One firm’s ‘compliant’ is another firm’s exposure of practices that may limit their income.

“[So] unless ‘compliant’ is spelled out and enforced it's a word that has lost its validity in this space. Arguably the same has happened with ‘umbrella’ that these days can mean a number of things.”

'Umbrellas are finished'

Umbrella companies themselves seem to agree that the current scrutiny of their operations will see them irrevocably changed.

Carolyn Walsh, who runs CWC Solutions said: “I think ‘umbrella companies’ -- as they currently stand -- are finished in the long-term.

“But they could ‘phoenix’ and become a useful part of the labour market in a different way.”

'Accreditation has stopped non-compliance claims'

Meanwhile, another umbrella company says because of the unprecedented level of scrutiny of umbrellas (even the BBC has run two exposés), its owners felt forced to pay for a stamp of approval.

“We’ve been building back up in other areas, namely in sectors where contractors appreciate the honesty and want some control over which umbrella they use. Equally helpful is that the accreditation has stopped agencies accusing us of non-compliance,” the owners said.

Ironically, an agency director on Friday handed ContractorUK emails showing him politely declining the services of an ‘umbrella’ he told an external representative of he felt “dubious” about partnering with.

'The perfect brolly for IR35-hit PSCs'

Not that the representative gave up. “[This is an] umbrella that offers higher percentages to the candidates [in terms of their take-home pay],” persisted the rep, adding:

“[So it’s] perfect for those ‘LTD’ candidates who are affected by IR35 and are used to their [comparatively higher] ‘LTD’ earnings.

“[Person X at this umbrella] would definitely be able to give you a very competitive ongoing monthly referral fee for each candidate you put through [to] him. It’s worth having a chat with him, is it something you’d like me to arrange?”

'Shortern the supply chain'

An engineering PSC said online that the ultimate solution is to cut out brollies; so “shorten the supply chain” whereby end-users who need inside IR35 workers simply “employ them” directly.

But new legislation that bans brollies outright still appears to be an outside bet according to Osborne Clarke.

Saying in an advisory that the government cannot easily ban umbrellas, the legal firm said: “Government departments, major consultancy businesses, law firms and technology businesses all regularly second employees, and many economists would argue that it a healthy thing for the UK economy for people from time to time to be assigned out to learn the ropes at client businesses.

“And a lot of staffing industry turnover involves ‘just’ payrolling workers that the client or third parties refer to them – that valued activity is effectively employee leasing i.e. effectively umbrella activity.

“Therefore it would be damaging to prohibit all employee leasing, and that seems to have been accepted by government policymakers we have spoken to in the past about this issue.”

'Not enough to just get audit certification'

To IR35 expert Chris Mattingly, the stand-out section of the legal firm’s advisory is the warning against ‘badging up’ with an industry body or compliance specialist and then doing nothing.

"It is NOT enough under current UK legislation just to select ones [umbrellas] that are members of trade associations or have some sort of audit certification,” Mr Mattingly, CEO of IR35 Navigator said, quoting directly from Osborne Clarke.

The firm’s advisory continues: “That is not enough to eradicate risk under legislation and there is no formally approved audit standard yet (though that may come). Certainly it helps to check the umbrella is approved by Professional Passport or the FCSA or the like, but all in the supply chain will still need to carry out regular spot checks”.

'HMRC intends to disrupt the market'

Osborne Clarke concludes that an easy and potentially the “best” way to regulate umbrellas would be for the government to make end-clients liable for all failures in their supply chain, “especially relating to tax, holiday pay and National Minimum Wage.”

A former tax inspector agrees, suggesting such a framework is waiting in the wings as a sort of option of last resort.

Speaking on condition of anonymity, the former inspector said last night: “HMRC intends to disrupt the market in which these companies [umbrellas] operate.

“One thing that can be done is to place a moral obligation on users in order to tackle this type of fraud from within their organisations.

“But if this call falls on deaf ears, then as happened with the IR35 reform, there could eventually be legislative changes which will transfer PAYE debts of umbrella companies up the supply chain, ultimately to the end-user.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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