Sorry contractors, but the government getting a grip on umbrella companies is still a long way off

The fact that the government is actively committed to regulating umbrellas is a consequence of years of concern and campaign work by workforce experts such as the Recruitment & Employment Confederation (REC), writes Kate Shoesmith, deputy CEO of the REC.

Unworkable, harmful even

Yet unfortunately, we are still a long way from government getting a grip on umbrellas, some 20 years on from their appearance in the labour market. That’s because some of the suggestions around tax avoidance in the recently closed consultation on umbrella companies are probably unworkable. More than that -- the proposals are potentially even harmful to our world-class flexible labour market.

Positively, we can feel a sense of optimism at the broader suggestions on regulation, but we’re more than just a little concerned at the specifics. 

In particular, the suggestion in the now-closed ‘Tackling Compliance in the Umbrella Company Market’ that employment businesses are held liable for the unpaid tax debt of umbrellas is puzzling, given that it is extraordinarily rare in business that another business shoulders the burden of liability for any other supplier in their supply chain. It smacks of a quick fix that will put employment businesses in quicksand.

Officials ought to get umbrella companies back in their sights

And a lesson of the post-pandemic era is that the UK needs dynamic employment businesses to help organisations deal with labour and skills shortages. We urge the government to stay focussed on regulating umbrella companies, and scrap this grossly unfair proposal to pass the buck.

More broadly, due diligence on tax should remain with -- and get enforced by – HMRC, because employment businesses do not have sufficient powers to obtain any tax information, or the tax expertise to spot tax non-compliance. This makes it unrealistic to pass these responsibilities onto employment businesses who do not have the powers of investigation or enforcement of HMRC.

No start date

So, regretfully the contractor sector looks a long way off regulation of umbrella companies, with no clarity on if and when any regulation would become law.

Nevertheless, we are keen to work with government to ensure the central roles of the Employment Agency Standards Inspectorate and HMRC. And we have told the government to stick to the tried and tested definition of ‘umbrella companies’ and the ‘temporary work agency’ definition contained within the Agency Workers Regulations 2010.

Earlier on I mentioned a cause for optimism. Well, there is progress in government thinking around minimum legislative requirements for umbrellas to comply with, and aspects of the umbrella’s involvement in the supply chain the regulations should cover.

What’s good and what we therefore support (cont.)

We support setting minimum standards about how umbrella companies should perform their function as umbrella companies (as they will be defined), to support employment businesses in meeting their statutory obligations as the business responsible for providing work-finding services and supplying the individuals.

This approach to the regulations would set minimum standards in a wider range of aspects of umbrella companies’ involvement in the agency work supply chain.

Consider the Conduct Regs, or similar, for brollies

But we think that this should not be the full extent that the regulations cover. For example, it seems logical for umbrella companies to have similar obligations to those as employment businesses that operate within the Conduct of Employment Agencies and Conduct of Employment Business Regulations 2003, in terms of their relationship with the individual worker.

Helpfully, a Manifesto for Good Work by the Chartered Institute of Personnel & Development recommended for the protection of workers’ health and rights, the creation of a well-resourced Single Enforcement Body (SEB). Like regulation of umbrellas, we at the REC and many labour market organisations have called for a SEB for years.

The case for a Single Enforcement Body is still strong

Why? Well, there is still no open flow of information from one body to the next. A SEB would make intelligence-sharing far more effective and provide a single point of reference when things are reported. This will lead to greater efficiency and value for money for the taxpayer.

In the absence of a SEB, we agree with the government that the EAS Inspectorate should enforce umbrella company regulations. But EAS will require extra resources to effectively cope with the added responsibility.

Lastly, bring in the taxman…

Finally, it’s our view that it is disappointing to see no enforcement mechanism suggested by government which lends itself to the expertise of HMRC. The EAS should not have to enforce umbrella company regulations that require expertise outside of their remit. Ultimately regulation to reduce and prohibit tax avoidance and evasion should sit firmly with, them again -- HMRC.