Government reveals long-awaited plans to tackle umbrella non-compliance

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After waiting almost one and a half years for the government to publish their plans on regulation of the umbrella company market, we finally got a 58-page consultation document this week outlining their plans.

On the table are a whole host of options that vary in impact on the supply chain. The aim being to tackle non-compliance from umbrella companies and to bring about greater protection for umbrella workers. But, as trailed from our webinar with the Small Business Minister, the government has seemingly dropped its plans for a Single Enforcement Body (as it will likely run out of Parliamentary time to legislate such a commitment).

Below, we review how the long-awaited plans could work in practice and share IPSE’s immediate response to the proposals.

Defining an umbrella company

To regulate the umbrella company market, the government has recognised that it first must define what an umbrella company is in law.

It has set out two options for doing so; either by establishing a single statutory definition, or three key tests which must be met for a business to be considered an ‘umbrella company’.

It’s obviously going to be very difficult to accurately define what an umbrella company is, but it is encouraging to see government commit to doing so.

Minimum legislative requirements

After defining umbrella companies, the government will then need to make regulations outlining the minimum legislative requirements for umbrella companies to comply with.

Areas of focus here could include the handling of pay and holiday pay, as well as the provision of a Key Information Document.

There is, however, no reference in the consultation document to the use of ‘kickbacks’ – a payment or commercial relationship made between an umbrella and an agency in return for facilitating the recruitment of a contractor to that specific umbrella company.

We already know that the government plans to introduce rolled-up holiday pay for umbrella company workers and establishing minimum requirements would be a welcome step in the right direction.

Who would be responsible for enforcement?

Despite previously committing to establish a Single Enforcement Body (SEB) in 2021, these plans have now been seemingly shelved. This is because the creation of a SEB would be 'subject to there being sufficient Parliamentary time needed to legislate.' The government’s preferred approach is to expand the remit of the Employment Agency Standards Inspectorate (EAS), which already regulates employment agencies and employment businesses.

The consultation also explores whether legislation is required to extend civil penalties for breaches of umbrella company regulations.

Whilst it’s positive to see government look at enforcement within the sector, we are slightly concerned that the EAS is already under-resourced for its existing remit and may be unable to deal with one which is significantly expanded.

Mandating due diligence

One notable point of feedback from stakeholders responding to last year’s call for evidence was that clients don’t always carry out due diligence on the umbrella companies they engage.

As such, the consultation is interested in implementing a requirement for businesses that use umbrella companies to carry out due diligence, with a penalty implemented for failure to do so.

This proposal would be a positive step in preventing non-compliant umbrellas from entering the supply chain and we can only hope that this would stop contractors from being led into an unscrupulous arrangement by their clients.

Transferring tax liability along the supply chain

Currently, if HMRC goes after non-compliant umbrellas for Income Tax and National Insurance, the tax liability can transfer to their employees – the contractors – should the umbrella not be able to pay.

This is obviously a deeply troubling set of circumstances. Thankfully, the government has now recognised that these workers – who may not realise that their umbrella is not complying with tax rules – should not be responsible for paying any unpaid tax in this instance.

Instead, they’re consulting on giving HMRC the power to transfer an umbrella company’s tax debt to another party in the supply chain, when the debt cannot be collected from the umbrella company itself.

The very fact that government has now recognised this injustice that would see contractors covering the tax bills of unscrupulous providers is hugely welcome news.

Agencies becoming a ‘deemed employer’

The next option for the umbrella company market is to prevent umbrellas from handling ‘gross funds’ – this is whereby an umbrella works out an umbrella company worker’s gross pay from the assignment rate.

This proposal would see the party sitting above the umbrella in the supply chain (typically an agency) become responsible for deductions of Income Tax and National Insurance on the fee that is then paid to the umbrella company worker.

This is an interesting proposal that could ensure PAYE is accurately processed, but we would need to see how this would work in practice and consider the impact this could have on parties in the supply chain.

IPSE’s reaction and your feedback:

It’s encouraging that we even have some proposals for regulating the umbrella company market. This has been long-overdue. Whilst it’s disappointing that plans to establish a Single Enforcement Body have been seemingly shelved, we should welcome many of these proposals as steps in the right direction. Let’s not forget that the sector remains unregulated.

Of course, contractors wouldn’t need to be operating via these umbrellas if government rowed back on IR35… (but that’s a whole other article!)

IPSE will be submitting a full written response to the consultation. We plan to use upcoming Member Meet-Ups chaired by our Policy Team as well as our Policy and Research Committee to gauge your views on whether any of these options will be suitable for regulating the umbrella company market.

We also plan to continue our engagement with the Small Business Minister and other officials in the Treasury and the Department for Business and Trade.

You can also write to [email protected] to share your feedback and ideas for consideration.


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Meet the author

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Joshua Toovey

Senior Research and Policy Officer