The government has opened a consultation on its proposals to better define umbrella companies and ensure they provide employment rights to workers and comply with tax regulations. It has received a mixed response so far with a number of commentators questioning whether the aim - to simplify the law - will ever be achieved.
The consultation is joint publication by the Treasury, HMRC and the Department for Business and Trade and will run until 29 August. It calls for views on proposals that could see umbrellas facing tighter regulation. There is no statutory definition of an umbrella company, but it’s described in the consultation paper as ‘a business which employs a worker with a view to that worker being supplied to work for, and under the control of, the end client.’
The background to this is the government’s call for evidence in the umbrella company market which was published in November 2021 and closed on 22 February last year. This latest paper, a long time coming, is both the government’s response summarising the evidence and a call for a further consultation.
A good summary of where we are now is provided by Susan Ball, the immediate past president of the Chartered Institute of Taxation. She thinks this is a another missed opportunity to align tax and employment law. In her article on the RSM website she says: ‘The issue of tax non-compliance among umbrella companies has long been on HMRC’s radar, so it’s surprising it’s taken so long to reach this point.’
She goes on: ‘It's a lengthy and important document posing some big questions, including defining umbrella companies, transferring PAYE debts, moving responsibility for operating PAYE and mandating supplier due diligence. This could include checks on all taxes - including corporate tax, VAT and PAYE - by all parties who are using umbrella companies in their labour supply chain.’ She adds; ‘This also feels like another missed opportunity to align tax and employment legal rights and definitions, which would make it simpler for organisations to comply. The emphasis here seems to be on additional regulation to tackle non-compliance rather than tax simplification, which feels at odds with recent statements which have said tax simplification will be embedded at the heart of the tax system as a core HM Treasury and HMRC priority.’
The Government's consultation sets out three main objectives for the umbrella market: (1) delivering improved outcomes for workers; (2) supporting a level playing field in the umbrella market; and (3) protecting taxpayers from the significant revenue losses that currently arise from non-compliance.
To tackle non-compliance, they propose three possible options: (1) Mandating due diligence; (2) Transferring umbrella tax debt to other parties in the supply chain; and (3) Making employment business the "deemed employer" for tax purposes where umbrellas are involved. Of the three, the generally held view is that Option 2 is the most likely, though quite how that will operate in practice is unclear:
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.
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 consultation is joint publication by the Treasury, HMRC and the Department for Business and Trade and will run until 29 August. Paragraph 6.1 sets out how to respond to any of the 52 questions they’ve put forward. You can do that either by email to the Treasury or by post, or possibly even have a face-to-face meeting. They say, ‘officials will consider requests for face-to-face meetings, particularly from groups or organisations representing large numbers of individuals or businesses.’ In case you do want to respond, we have put a link the consultation paper in the transcript of this programme for you.
- Link to government consultation paper: ‘Tackling non-compliance in the umbrella company market’