The use of umbrella companies is on the rise and the Revenue continues to warn agency workers and contractors employed by umbrella companies about tax avoidance schemes designed to allow agency workers and contractors to keep more of their earnings. They’re unlawful, of course, but why should that concern end-users? We’ll consider that.
A reminder. Umbrella companies employ individuals on behalf of end user clients and the employment businesses that supply the workers to them. Although the workers are employed by the umbrella company, they don’t provide services to the umbrella company itself. Rather, they provide their labour to the end user client, typically on a short-term basis. Crucially, it is the umbrella company that is responsible for paying salary, deducting tax and national insurance contributions, and managing employment rights such as holiday pay, sick pay, and workplace pension auto-enrolment.
Last year, recognising the widespread abuse of umbrella companies to avoid tax, the government opened a Call for Evidence inviting views from everyone in the entire supply chain. That closed in February and we still await the government’s response.
The driver here is the government wants to encourage a dynamic and flexible labour market, and recognises the important role that umbrella companies play, but in too many cases they are being used to exploit workers and avoid tax. So, typically, non-payment of holiday pay and sick pay, and a lack of transparency when it comes to pay rates, fees and charges, a failure to pay the correct amounts of PAYE and NICs.
So let’s hear more about that tax compliance problem and why it’s something end-users should be concerned about. Chris Thomas is a tax specialist who joined me by phone to discuss this.
19 July 2022
Chris Thomas: “We have seen a significant growth in the use of these umbrella companies following the introduction of the IR35 regime in particular, I think, and it has been a very convenient way for a lot of end users to engage contractors who may otherwise fail IR35 but maybe you don't want to be taking these people on as employees directly, you'd rather outsource some of the admin and responsibility and the risk of doing so, and the PAYE compliance. So there are lots of good reasons for using umbrella companies. However, it does also create additional scope for non-compliance from a tax perspective, as well as from the employment rights perspective and the government clearly has some concerns about that. That relates to various anti-avoidance that has been going on in relation to disguised remuneration schemes and abusing travel and subsistence rules and such. So in terms of what this kind of might mean for end clients, I think from the end client perspective there are a number of risks here. It isn’t necessarily just the case that this is just a problem for the umbrella companies and the employment businesses, there are also risks that that kind of kind of flow further up the chain here. One of them, I think, which I would flag specifically is if there's any offshore entities in the supply chain which in these noncompliant cases there quite often is, because in those cases, actually, there is a real risk that the end user could end up being liable for tax itself, I've seen that happening in a number of cases for different clients. There are also reputational issues if it comes to light that that your workers are being engaged through structures which, ultimately, are not as compliant as they should be. There is also a potential in perhaps more extreme cases for the corporate criminal offence to possibly be engaged, the failure to prevent the facilitation of tax evasion. I'm not saying that would be in play in most cases but turning a blind eye can be enough to engage that in the right cases. Then I think there's also the risk that if nothing is done to address this, and this isn't addressed within the sector, that the government might look at bringing in further action itself, new regulations, new obligations. They haven't specifically suggested that they'd be looking to target any of that at end user level, as compared to the employment business, but nonetheless there must be a possibility here that, as they have done in other cases, they look further up the chain to police what's going on here. So in a way, it's in everyone's interest that this kind of non-compliance is tackled and the government doesn't feel the need necessarily to introduce new regulation because that may or may not ultimately be beneficial from the end client perspective.”
Joe Glavina: “So what’s your key message to HR, Chris? Any action steps?”
Chris Thomas: “It reinforces some of the messages that we would always say to end clients when they are dealing with flexible labour generally and it comes back in large part to knowing your supply chain. Make sure you actually understand the structure through which people are being supplied to you because it can be quite long, it can be quite complicated sometimes. Ensure you've got the visibility there, and reporting and, maybe, audit rights, in the contract you've got with the employment business for the supply of people so that you can be clear that things are being done how they are supposed to be done, you can be sure there are no offshore entities which could be specifically prohibited for example, and generally make it the responsibility the employment business to make sure that this is being done and you are indemnified. These are the sort of things, I think, that should be specifically looked for in your relationship with the employment business.”
The government’s call for evidence on the umbrella company market closed on 22 February and we are still waiting for the response. One of the options being considered, rather like the approach taken with IR35, is to hold companies jointly responsible for tax or employment rights breaches that happen down their labour supply chains. So although you might not employ a worker directly, nonetheless if they are performing labour for you then, the argument goes, perhaps you should have some responsibility to make sure they are not underpaid or exploited? Time will tell whether the government goes in that direction but meanwhile if you would like to read the background to this it is set out in some detail in the governments Call for Evidence paper on its website. We have put a link to that in the transcript of this programme.
- Link to Call for Evidence: umbrella company market