Tucked away in the Red Book, traditionally published alongside the government’s Spring Budget, was the announcement that government will be providing an update on its plans for the umbrella company market.
This is set to take place on the excitingly named Tax Administration and Maintenance Day – April 18th this year.
So with an announcement forthcoming, we thought it a good time to recap the five major policy points in the consultation and provide an update on IPSE’s recent lobbying activity in this area.
We all have an idea of what they are – but did you know there is no legal definition of an ‘umbrella company’?
The consultation recognised that in order to regulate the umbrella company market, government must first define what an umbrella company is in law. They have suggested two options for doing so.
But it’s clear from our conversations with industry insiders that defining exactly what an umbrella is – without inadvertently bringing other parts of the supply chain into scope – could be tricky.
Unscrupulous umbrella companies can leave unwitting contractors with unexpected tax bills once HMRC detects them. But clients and agencies who guide contractors into these arrangements aren’t always doing their homework on the umbrellas they work with.
The government has identified this problem and has proposed three interesting solutions to clamp down on this and stop contractors from bearing the brunt.
The first is a proposal to mandate due diligence by hirers. This would involve forcing businesses that use umbrella companies to carry out due diligence on the these umbrellas, with the threat of a penalty for failure to do so.
This can be considered the least radical proposal here, with the market carrying out a form of self-regulation to ensure compliance.
The second option would see tax liabilities created by umbrella companies move up the supply chain to another party when they can’t collect from the umbrella itself. It wont surprise you to know that agencies aren’t keen on this option.
And finally, the third option is to make agencies become the ‘deemed employer’ of the contractor. Agencies would become responsible for deductions of Income Tax and National Insurance on the fee that is then paid to the umbrella company worker. Agencies aren’t particularly keen on this one either, particularly smaller agencies for whom running a big payroll would be a big administrative burden.
Elsewhere in the consultation, there’s a rather curious proposal to define exactly what constitutes a ‘personal service company’ – a term that IPSE doesn’t actually recognise but it is commonly used to refer to limited company contractors.
The consultation is extremely vague when it comes to this proposal so it’s hard to fully understand what the government intends to do and how it would work in practice.
With parliamentary time rapidly running out, any commitments to legislate in this area will need to be brought forward quickly.
Many of the plans outlined in this consultation require legislation to be passed and this may well play a part in government’s thinking when they announce their plans in two weeks’ time.
IPSE will continue to press government to implement the much-needed regulation of the umbrella company market and not allow this issue to be put on the scrapheap due to a lack of parliamentary time available.
IPSE responded to the consultation back in August, so it’s pleasing that government is now bringing forward their plans. Since then, the IPSE team has participated in a number of roundtables with the Department of Business and Trade, HMRC and the Financial Secretary.
During these discussions, we’ve highlighted the need to prioritise the experience of the individuals. Clients, agencies, HMRC and umbrella companies themselves all have their own preferences for what regulation could look like, but it’s the individual umbrella workers that should ultimately benefit. If things don’t get better for them, regulation has failed.
We’ve also asked for clarification on the suggestion that PSCs might be defined. We don’t expect much movement on this on Tax Maintenance and Admin Day, but it’s definitely something we are keeping an eye on. With our ‘IR35 hats on’ we can see potential benefits here: could a business that meets a PSC definition be deemed a legitimate business, and therefore outside the scope of IR35? Maybe, but it’s also possible that a legally defined PSC might be regarded as ‘not-a-proper-company’ and therefore excluded from company taxation status.
We’ll be sure to update IPSE members and the wider self-employed community on what the government’s update means for umbrella company regulation and how it could impact the sector.
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