Consultation launched on tackling non-compliance in umbrella company market

Proposals seek to define umbrella companies and set out minimum standards and enforcement options.

Workers may supply their services to end clients in a variety of ways, whether as a sole trader, in partnership with others or via a service company or umbrella company. These various ways of providing services have formed part of a surge in the numbers of workers in what has colloquially been termed the ‘gig economy’, typified by an individual having a distant relationship to an employer or client in exchange for flexibility.

There is no statutory definition of an umbrella company. HMRC describes them as a company that employs temporary workers who work for different end clients.

In effect, umbrella companies act as a middleman. They employ the individual who agrees to provide their services to end users. The umbrella company does not find work for the individual, rather this is done by a recruitment agency (known as an “employment business”).

Because of the nature of this arrangement, which involves agreements between the worker and the umbrella company, the umbrella company and the employment business and then the employment business and an end user, tricky questions around employment law rights and liabilities as well as tax issues arise. Indeed, the lack of a clear definition of what an umbrella company is together with the segmented relationship between the worker and end client has led to accusations from some workers and workers’ groups that umbrella companies take advantage of the uncertainty, deny employment rights and engage in exploitative practices.

Review of the umbrella market

At the end of November 2021 HM Treasury published a call for evidence on the so-called ‘umbrella company market’. A summary of responses was published on 6 June 2023.

More than 400 responses were received, and a broad picture was established of the need for reform. One response described the umbrella company market as ‘the wild west’ and workers outlined various disadvantages of being engaged via an umbrella company. In particular, attention was drawn to the practice of umbrella companies charging workers for services (including for processing pay), employment businesses directing workers to use umbrella companies in which they hold an interest and the problems with enforcing employment rights.

As a result of the evidence, HM Treasury updated its guidance Working through an umbrella company and the Department for Business and Trade published guidance for agency workers paid through umbrella companies.  

The government considers that the responses to the call for evidence support state enforcement and regulation of umbrella companies as part of a broader approach that addresses tax issues.

On the same date the responses were published, HM Treasury published a consultation – Tackling non-compliance in the umbrella company market which will close on 29 August 2023. 

The government has outlined a two-step process for tacking compliance. First, primary legislation will define what an umbrella company is and the government will then consult on the specific requirements/ standards to be placed on umbrella companies before implementing them.

Defining an ‘umbrella company’

The consultation seeks views on two definition options.

1. Limit engagement in the recruitment sector to four permitted methods including an umbrella company, which would be defined as a ‘corporate work-seeker not controlled by the individual doing the work’.

2. Alternatively, set out three conditions that a business should meet to be considered an umbrella company:

a. there should be two separate businesses (an employment business and end client) involved in supplying the worker in addition to the umbrella company;

b. the umbrella company has a direct contractual relationship with the individual to be supplied to an end-hirer under which it pays the individual the agreed rate; and

c. the umbrella company receives a form of commission or fee for the service they have provided as an umbrella company which is commonly deducted from the individual’s gross pay.

Setting standards

The government proposes to create minimum standards for umbrella companies to comply with. The consultation sets out two options for this and seeks further input on these:

1. Set minimum standards in key areas, including how pay and holiday pay are administered. Prevent umbrella companies from making employment contracts conditional on individuals agreeing to pay for additional services, and put umbrella companies under a duty to provide key information documents (KIDs) to workers, which contain key information on pay, deductions, as well as holiday and other benefits entitlements.

2. Minimum standards are set for the performance of umbrella company functions. Examples given include employment businesses ensuring only suitably qualified staff are supplied to perform work, and/ or requirements about pay rates that employment agencies and businesses must comply with when advertising jobs with the aim of making the individual’s gross pay clearer.

Enforcement of standards

The consultation also seeks views on which body should enforce umbrella company regulations and how proactive this should be.

The government’s preferred approach is to expand the remit of the Employment Agency Standards Inspectorate (EASI), which already regulates the recruitment sector where umbrella companies are used. The government’s view is that the EASI would be able to use its current enforcement powers (which includes the power to enter premises), to seek enforcement undertakings and orders, prohibit individuals from running recruitment businesses and prosecute where it is in the public interest.

The consultation seeks views on whether civil penalties should be extended to wage arrears arising from breaches of the regulations when these come into force, and at what level they should be set.

The consultation sets out two approaches to enforcement activity for the regulating body:

1. Maintain the same reactive/ proactive approach it currently takes with employment agencies and businesses as part of a compliance-based approach. This would mean EASI would first try to educate an umbrella company upon receipt of a complaint and try to correct the breach, only taking enforcement action if necessary. EASI would also apply its current practice of proactive inspections based on risk information and could focus its inspections geographically or by sector.

2. Alternatively, EASI could take a purely reactive approach to enforcement (similar to an Ombudsman) and would mean it only responds to complaints from an individual, whilst carrying out proactive visits to enforce existing standards for employment agencies and businesses, as it does now.

Other proposals

The government is considering introducing a broad statutory due diligence requirement, with all forms of tax non-compliance (including error avoidance and fraud). Penalties for non-compliance would be fixed or linked to the amount of tax not paid. Views are sought on the need for safeguards.

Another option considered for enforcement from a tax perspective is that HMRC would be given the power to collect an umbrella tax debt from another business in the labour supply chain. The intention is to encourage employment businesses and end-user clients to take greater care in selecting umbrella companies. This proposal would target unpaid income tax and NICs but may include VAT and others.

The consultation is also considering introducing legislation to deem another party in the labour supply chain as the employer for tax purposes and responsible for operating PAYE (i.e. the umbrella company would no longer be responsible for this). The consultation proposes this responsibility lies with the end-user client.

Comment

This response and consultation follows in the footsteps of the Taylor Review published in 2017, which observed that umbrella companies sometimes played questionable roles in relation to lower-skilled agency workers. The Taylor Review touched on the fact that umbrella companies obscure who is responsible for employing and paying workers and charge confusing administration fees.

There is a sense that the practices of a rogue few have tarnished the wider reputation of umbrella companies and so it will remain to be seen whether those companies seeking to comply with the letter and spirit of the relevant employment laws will help the government to root out the more unscrupulous elements.