Last week we highlighted how the use of umbrella companies is on the rise with the Revenue warning 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. We explained how end users could be affected, and the importance of checking supply chains to ensure the correct taxes are paid. We are returning to umbrellas to flag the other big issue which is employment rights.
The background to this is the government’s Call for Evidence back in February. It’s looking at the role that umbrella companies play in the labour market and how they interact with the tax and employment rights systems. The umbrella company market has grown fast in recent years with a greater emphasis on flexible working models and that growth has brought a number of tax and regulatory challenges, and that’s what the review is focused on. The government has still not yet responded to that consultation but it’s likely that, when they do, we will see reform of some kind.
So, where does the umbrella company sit a typical supply chain and how is it meant to work and what about those potential reforms? To help with that I phoned Edinburgh-based Emma Johnston:
Emma Johnston: “So umbrella companies, they play a relatively unique role in the UK labour market, They arrange engagement of temporary workers but usually the umbrella companies actually employ those workers and they pay their Pay As You Earn, they apply the employment taxes, and then the umbrella company engages, potentially, an agency intermediary who then in turn provides those workers to an end user. So the relatively unusual aspect of this arrangement is that umbrella companies employ workers but the workers don't provide those services to that company, but to another business further up the contractual chain. So, as most umbrellas employ the individuals, they are required to provide those employees with employment rights just in the same way as any other employer would. This means that the employees are therefore entitled to the usual statutory payments, statutory sick pay, maternity pay where applicable, holidays, pension contributions, and so on. Umbrella companies are being used more and more to provide that flexible resourcing model that a lot of end users are requiring. They are attractive, as I say, because they carry that administrative payroll burden - they apply the tax and national insurance contributions at source - which means that the end user and the intermediaries don't need to worry about it.”
Joe Glavina: “Tell me about the government’s Call for Evidence, Emma”
Emma Johnston: “Yes, so the government has released a paper calling for evidence from relevant stakeholders - the workers themselves, the umbrella companies, agencies, end users - just basically asking for their experiences of working under this umbrella arrangement. This call for evidence has arisen as a result of a huge increase in the number of individuals being engaged by these umbrella companies but that, combined with a growing concern about the potential for exploitation of workers under those arrangements. The call for evidence identifies a few concerns and the main one, or one of the main ones, is non-compliance with employment law rights. There is a concern about a lack of transparency in terms of pay and holiday entitlements, and so on. The concern that's identified is that this is leading to unfair practices where certain, probably a smaller number of non-compliant umbrella companies, are then able to undercut and charge less than the more compliant companies and gain an unfair advantage. That creates a bit of an issue for end users because they may be able to offer a cheaper service, but the idea then being that those cheaper services, potentially, are arising from exploitation of individuals which is not usually what an end client is going to want to have to deal with in their supply chain. So, it's something that's of interest not only to umbrella companies, and individuals, but also to the end clients from the perspective of knowing what their supply chain looks like.”
Joe Glavina: “Is there any action that end-users should be taking now, Emma, or is it a case of waiting until the government reports back?”
Emma Johnston: “I think for end users there’s nothing there's no immediate action that needs to be taken at this point. It's very much a watching brief to see what the outcome of that call for evidence is but, generally speaking, this is part of an attempt by the government to hold organisations in general accountable for these employment rights and so it should be of interest to end users in that respect. There is scope for reputational issues, of course if, for example, a group of workers that were engaged for work in a particular end user were being mistreated by the umbrella companies and quite often in these circumstances what you find is that the memorable name will potentially be the end user name and although the end user is not necessarily responsible for the way that these individuals are treated by an umbrella company, that is the name that would potentially hit the headlines and so it is it should be of interest to end users to ensure that their supply chain is as compliant as possible.”
The other angle to this is tax compliance which is something we covered last week. Tax specialist Chris Thomas told this programme why end users should check their supply chains carefully when umbrella companies are involved to ensure the correct taxes are being paid. That’s ‘Check supply chains for shady umbrellas, warns tax lawyer’ and is available for viewing now from the Out-Law website. We’ve put a link to it in the transcript of this programme.