Government urged to create single enforcement body to protect workers
The consultation into the role umbrella companies have in the supply chain and labour market has now closed.
Industry experts have renewed their calls for the government to act and set up the single enforcement body (SEB), which funding has already been allocated for through the Department for Business, Energy and Industrial Strategy (BEIS).
Umbrella companies act as an intermediary between clients or recruitment agencies and temporary staff, such as contractors, and tend to deal with payroll issues.
But in recent years, professional organisations have raised concerns about rogue umbrellas abusing the system and taking billions of pounds from contractors and breaching workers’ rights.
Loan charge scandal exposed rogue umbrella companies
The loan charge scandal is one of the reasons experts have been calling on the government to regulate the umbrella sector.
The loan charge was introduced to tackle loan schemes, which were considered non-compliant disguised remuneration arrangements.
It is essentially a tax charge on these loans taken out on or after 9 December 2010 and outstanding on 5 April 2019.
HMRC has been slammed for its approach to the loan charge by targeting contractors. Many contractors who fell victim to the schemes – some through no fault of their own – have been hit with huge tax bills, with some even committing suicide as a result.
Industry bodies have said the “true villains” were the “promoters and providers of disguised remuneration schemes.”
IR35 reform linked to increase in umbrella employees
More recently, IR35 reform in the private sector has seen a significant rise in the number of contractors working via an umbrella company.
In 2008, the tax watchdog estimated the number of people working through these intermediaries to be around 100,00. This figure jumped to between 300,000 and 400,000 in 2015, and in 2021 it is estimated to have surpassed 600,000.
Last month, the House of Lords Economic Affairs Finance Bill Sub-Committee published a report, which highlighted that the off-payroll rules have had a direct impact on the increased use of umbrella companies.
Lord Bridges of Headley, chair of the committee, said: “The whole point of the off-payroll reforms was to crack down on tax avoidance.
“Yet, as we warned the government in our sub-committee’s report in 2020, it risks giving rise to a new wave of tax avoidance, as people — many of them on low incomes — end up in rogue umbrella companies.”
Call for greater transparency and fairness
Bridges added: “The Government must take action to protect workers from ‘rogue’ operators as a matter of urgency. […] It is unfair for individuals to be treated as employees for tax purposes without having employment rights.”
Andy Chamberlain, director of policy at IPSE, explained that in its submission to the consultation, the trade body for self-employed workers called for “greater transparency and choice for contractors to be embedded into umbrella company regulation”.
He also said that the government must address “the unfairness of paying for both employee and employer tax obligations and coming down hard on non-compliant operators.”
“Those caught by IR35 – often as a result of an incorrect determination by their client – have been presented with a limited choice of umbrella companies to sign up to. Others are given no choice at all and simply assigned to a particular umbrella.
“This must change but it will need more than just umbrella company regulation – the whole supply chain must work together to ensure providers are not just compliant but are in the best interests of the workers.”
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