What my contractor umbrella company makes of the consultation to regulate our business
A longer time coming than any other document of its kind I can remember, a government consultation aimed at some kind of regulation for the umbrella company industry was belatedly released on Tuesday, writes Lucy Smith, managing director of Clarity Umbrella.
How we got here
You have to go back to 2018 to understand its origins as far as government is concerned. Back then, the Taylor Review suggested that something needed to be done with the umbrella company industry. That recommendation then sat ignored for FIVE years. During that period, the IR35 legislation played ping pong (in play; announced for repeal; in play again), thereby overshadowing any progress on addressing this important part of the temporary workforce.
As seems to be the norm, the knock-on effect from a legislative change led to a rise in “umbrella companies” (I use this term in its widest, non-technical sense). These were businesses that tried and still are trying to cash-in on the move to a more cautious employment model.
In 2021, a Treasury call for evidence on umbrella companies suggested that there was movement and heavy concentration on whether the Employment Agencies Standards Inspectorate would be able to manage any such type of umbrella regulation, or if there would need to be changes to pull the business model into the Agency Regulations.
'More level playing field' vow is welcome, overdue
So backdrop aside, what are HMRC, HMT and the Department for Business & Trade now looking to achieve with their jointly-published consultation?
One of the first mentions in the consultation is that of “delivering improved outcomes for workers” which is great to hear.
But even more pleasing to hear from an umbrella perspective is that the government is looking “to support a more level playing field in the umbrella company market.” This is something that is very much long overdue in the contractor umbrella marketplace, where a select few larger businesses dictate.
We have seen significant and detrimental press coverage of late of umbrellas, over holiday pay and other payments being withheld from workers, leading to questions of legal or moral obligations to workers by umbrella companies. Implementing legislation and a “standard” to which all umbrella companies are required to adhere to could stamp out these issues. And it could ensure that all umbrellas are operating to ensure workers are paid their monies owed.
We have also seen a rise in tax avoidance schemes masquerading as “umbrella companies,” putting the traditional umbrella industry into further disrepute, defrauding the government coffers, and putting workers at significant risk of HMRC penalties and unpaid taxes.
Three new options for umbrella sector regulation
One of the options which the consultation proposes is that, in order to try and prevent these issues, an element of “mandatory” due diligence ought to be introduced. The idea is that employment businesses will be required to undertake this due diligence, if engaging with umbrella companies, or the employment business will risk ‘debt transfer’ down the chain for unpaid taxes.
There is a suggestion in the consultation that this tax debt could travel back to the end-client. However I find it difficult to see how anyone further afield in the supply chain could be held liable. An umbrella company very rarely has direct contact with the end-client who the worker is performing the work for, and similarly, the end-client wouldn’t likely have any knowledge (in principle) of the engaged umbrella company. So it would make sense for any liabilities to fall to the company closest to the umbrella in the chain. Sorry agencies!
The consultation also suggests (as ‘Option Three’) making the employment business the employer for tax purposes. But doing that risks relegating the umbrella company to being just a ‘payroll bureau,’ confusing matters as to who takes on the employment responsibilities.
HMRC has always had issues with the fact that tax and employment legislation do not always align with each other and has already been detected by commentators, this consultation is only going to highlight the complexities surrounding this.
But what about worker suitability?
In the 58-page consultation, entitled ‘Tackling non-compliance in the umbrella company market,’ there appears to be not a single mention of assessing workers’ suitability for working in this manner. So such an assessment may be part of future guidelines to be released to help individuals assess the best way to be paid. Let’s hope so.
In recent months, we have had many more individuals than usual approach us but we are unable to take them on, due to their day rates being too low. This influx risks them being taken on and being paid the National Minimum Wage, but by agencies which are not offering PAYE payroll, thereby pushing these individuals down what we fear is an unsuitable route for their assignments. Dispirited, these individuals tend to then look for the “best” take-home pay offer, which can lead them down the route of tax avoidance schemes.
It is interesting to read in the government’s new response to its November 2021 call for views that many workers believed an umbrella company’s administrative charge to be too high. To me this again suggests that these workers are not used to working in this manner, and would not necessarily choose the route of umbrella working. So they should have really been ‘agency workers’ under standard PAYE. Compliance in this industry comes at a cost, and is not something that any reputable company would ignore.
Reading between the lines, umbrellas aren't going anywhere
With the publication of this umbrella companies consultation, talk of the umbrella company model being outlawed appears to have been dismissed. Sorry unions! That indicates government is accepting of the model of umbrellas, if (and it’s a big ‘IF’) the model is used and structured properly.
What’s first? Well, the starting point is with the definition of an umbrella company, then onto applying a regulatory framework for those compliant umbrellas to operate by, and then – I imagine -- mandating due diligence for the agencies. Applying ‘debt transfer’ and penalties where this due diligence cannot be proven looks likely as the follow-up.
For now (and ‘already’ you might say, as none of us in the industry have given our blessing to the following idea), HMRC is exploring the role of a calculator, so umbrella workers can tot up their gross pay from their assignment rate, the deductible tax, and how much should get paid to HMRC.
KID, new conditions, and restrictive PSLs
All that sounds great in principle. But in reality, any such ‘calculator’ needs to be carefully considered due to the varying requirements of calculators, possible inclusion/exclusion of pensions, PAYE, student loans and varying tax codes, among other variables. If the in-force requirements relating to Key Information Documents were better monitored (and adhered to), there should be no requirement for such a calculator.
Three conditions mooted in the consultation, in order to be defined as an umbrella company, are worth consideration.
The first condition requires a look at the contractual chain (B2B from employment business to umbrella company with no further businesses in the chain). The second requires a contract of employment with the work-seeker with the contract agreeing to pay the worker an agreed rate (but any responsibility of work-finding services on the umbrella’s part removed). Thirdly, to be an umbrella, the company collects a “margin,” in return for the services they are providing, but deducts this margin from an individual’s gross pay.
Let’s end on a clear positive for contractors. The government has finally acknowledged in this consultation that the restrictive nature of Preferred Supplier Lists may be forcing individuals to engage with multiple employers; causing issues with continuity of employment, tax codes, and pension contributions. My hope is that this restrictiveness can be addressed. Sorry umbrellas, and agencies!
My nagging feeling...
The ultimate question, which the government’s 50-something questions go around the houses to ask, but never really do, explicitly, is this. Will what the government is floating for the umbrella company market hit the spot? I sincerely hope so, but I unfortunately feel that there is something missing. A surprising statement for me to make, perhaps, given how long the consultation document is, and how long it’s taken the government to produce.
We all know that HMRC don’t approve anything. But maybe now is the time. Would it not make more sense to badge the compliance? Or if not, back an accreditation company to give the agencies a clear nod on umbrella businesses that they can engage with, which in turn then prevents workers being unlawfully fleeced, immorally income deducted from and restricted with their choice of employment. Whatever your own thoughts, you can get them into the consultation here which I urge you to do before August 29th.