Following the Good Work Plan of 2018, which introduced a commitment by the government to regulate umbrella companies, a call for evidence in 2022 gathered the opinions of over 400 contractors, representatives and stakeholders within the umbrella company market. As expected, the evidence gathered supported the rationale for state enforcement, with many individuals reporting a lack of understanding about how engagements worked and poor treatment by some umbrella companies.
After a year and a half of waiting (and many, many calls for regulation from within the industry itself to help tackle non-compliance), on 6th June we finally saw the release of the ‘Tackling non-compliance in the umbrella company market’ government consultation.
Firstly, umbrella companies will be legally defined
The aim is to gather views on how to regulate umbrella companies, first and foremost by establishing a legal definition of an “Umbrella Company” (so that, once defined, the regulations to be applied to them can be addressed) and also by potentially curbing the methods through which individuals can be engaged.
Secondly, non-compliance will be tackled
The consultation further offers options to discourage non-compliance, a common theme of which is to add more onus onto those higher up the supply chain (i.e. clients and recruitment businesses) whether this is by carrying out mandatory due diligence, or being exposed to more risk than they are currently, should they engage with non-compliant umbrellas. The suggestions put forward include the introduction of a debt transfer mechanism (where another business in the supply chain would become liable for any unpaid income tax, NICs and potentially VAT where HMRC are unable to recover this from the umbrella) and making the employment business (and in some instances the client) the ‘deemed employer’ for tax purposes and ultimately responsible for PAYE deductions.
As non-compliant companies often have purposely complex structures which make it difficult to recover funds, the transfer of debt option would not only help to protect the Exchequer, but would also encourage employment businesses and clients to engage only with companies they are confident are operating compliantly (or that is the hope at least). It would also aim to discourage non-compliant businesses from exacerbating the problem by knowingly using tax avoidance schemes in the first place.
Thirdly, risk only occurs with non-compliance
Of course, with all the options put forward there will be no risk to any client or employment business where correct income tax and NICs are being made by compliant umbrellas such as PayStream. For this reason, the ‘deemed employer’ option in particular seems to propose an unnecessary additional (and potentially costly) administrative burden onto those employment businesses that are already using compliant umbrella companies. The other options to mandate due diligence, or allow a debt transfer in certain circumstance are perhaps more proportionate routes to take.
And finally, the consultation is a welcome step forward
PayStream welcomes the government consultation. Compliance has always been at the core of our business, so we are pleased to see that government is finally focusing on rooting out illegitimate companies within the industry. These companies put workers at risk of unexpected tax bills and ultimately threaten to bring down standards across the market. With non-compliant companies currently able to undercut those working within the law, we are hopeful that any upcoming changes will not only assist in creating a level playing field in future, but will result in a far better outcome for workers who will see fewer illegitimate companies in existence. Whatever the outcome, PayStream will be on hand to support our agencies and clients throughout the consultation process, and will of course be keeping up to date with any legislation introduced as a result.
