Government’s umbrella shake-up risks yet more upheaval for contractors

Having faced calls to regulate the umbrella company sector for years, government is now consulting with industry to figure out how to turn its promise to do so into reality.

This will be a multi-stage process, which IPSE has already contributed to in a meeting with Treasury officials this week. The trouble is, some of the ways forward proposed by government could cause yet more upheaval for the contractors and workers at the bottom of the supply chain – the very people that regulation should make life easier for.

Could brollies be regulated out of existence?

In responding to a preceding call for evidence on the umbrella company market, government made clear that it was “not minded to explore banning umbrella companies” (a position championed by the Trades Union Congress), acknowledging that “many businesses value this model of engagement”. Nevertheless, there is a risk that some of the options government has proposed to regulate umbrella companies could undermine the very rationale for using them.

Three ‘employers’ for one role

The most compelling example of this is the suggestion to make employment agencies the ‘employer for tax purposes’, which would require them to withhold an umbrella worker’s tax contributions before then passing the remainder of the worker’s gross pay onto the umbrella company.

For workers unsure about where to turn to resolve issues at work, adding another ‘employer’ into the mix only adds to the confusion. And, as contractors working inside IR35 will know, employment costs are one of the main deductions an umbrella company makes from their day rate; if this job then gets handed to agencies, would there really be any point in the umbrella being involved at all?

More skin in the game for agencies

The same can be said, to some extent, about another of the proposed options – to introduce tax debt transfer rules into supply chains, making agencies liable for anything that can’t be collected from a non-compliant umbrella. This would work similarly to the way that an IR35 tax liability can be transferred up the supply chain.

From the worker’s perspective, this is certainly an improvement on the current situation. But for agencies, the perceived risk of a gargantuan tax bill could be great enough to put them off working with brollies altogether – not dissimilar to the effect of the off-payroll working reforms on clients’ approach to hiring contractors (even those whose ‘outside’ status assessment had been signed off by a third party expert).

To be clear, neither of these are government policy – these are just two of the proposed policy options in the consultation, and there is nothing to suggest government is set to pursue any of them as currently drafted. But for them to be included in the document shows that a highly contentious outcome is not out of the question.

What would a world without umbrellas mean for contractors?

We know from recent IPSE research that the vast majority (70%) of freelancers and contractors currently working through an umbrella company are dissatisfied with this arrangement, and that in general, they are there because their client or agency insisted upon it. But does this mean that they would be better off without them?

The IR35 reforms motivated many contractors to retire early; but for those who continue to work, umbrellas – like them or loath them (or something in between) - have at least become a vehicle which enables them to engage on the projects they are passionate about. Agencies similarly benefit from reduced costs by outsourcing payroll responsibilities to an umbrella company.

But if the rationale for working with an umbrella company is unintentionally quashed, it’s not clear whether any but the biggest agencies could afford to pick up the slack, once again leaving contract workers – who just want to get on with work – potentially looking once more about closing their businesses earlier than planned.

What to do about umbrellas? We want your views

IPSE is finalising its response to the full consultation on behalf of its members; we’ll be hosting a webinar on Thursday 17 August, 12.30pm – 1.15pm, to run through our approach to the consultation and get your feedback on the issues at hand. IPSE members are also invited to a follow-up focus group on Tuesday 22 August for an opportunity to shape the final response with their own experiences.