Industry experts warn that further delays and government inaction risk “more problems” for the sector
The Government has issued its delayed response to a consultation focusing on the umbrella company industry – some 18 months after it closed.
That consultation, the Call for Evidence: Umbrella Company Market, ran from 30th November 2021 to 22nd February 2022. During this time, over 400 responses were submitted. The majority were from individual workers, with trade unions, accountants, umbrella companies and employment businesses also entering submissions.
In its response, the government said these will continue to “inform policy development”. Additionally, HMRC and government departments will continue to collaborate “to address the behaviours in the market that are causing concern”, and “focus on addressing both the tax and employment law non-compliant behaviour”.
As such, another consultation has been opened, seeking views on the “specific proposals” the government has put forward as a means of solving these challenges:
New ways to define umbrella companies
The government has indicated that it must define umbrella companies before it can introduce regulatory legislation for “the current and future umbrella company market”. It puts forward two methods to achieve this: either by introducing a firm statutory definition or by applying key tests.
The consultation identifies that the ‘key tests’ method offers advantages and disadvantages. As the definitions are “highly specific”, they allow for a “very precise” way of bringing businesses into the scope of regulatory enforcement.
However, the “key disadvantage” is that “deliberately non-compliant businesses may seek to structure around this definition (and so put themselves out of scope of the eventual regulations)”.
Tackling tax non-compliance in the contingent labour market
The consultation also suggests “targeted options to address tax non-compliance” in the sector. It states that “HMRC is aware of several types of tax non-compliance… including fraud and disguised remuneration”.
While the tax authority is “already taking robust action… in tackling this non-compliance”, the consultation proposes “a more strategic approach”.
One strand of this is clamping down on the abuse of two schemes, the employment allowance and the VAT flat-rate scheme. These are “targeted by fraudulent umbrella companies that abuse both schemes to benefit from lower levels of employer NICs and VAT”.
Suggested implementation of debt transfer up the supply chain
Another way that the government proposes to reduce tax avoidance – and encourage greater due diligence across the supply chain – is by transferring tax debt.
When non-compliant umbrella companies withhold tax from HMRC, the tax authority collects it from the worker, as has been seen with the Loan Charge.
The Loan Charge has had a disproportionate impact on workers, rather than targeting the tax avoidance scheme operators masquerading as compliant umbrella companies.
The new proposals seek to redress this balance. The government believes that “it may be more appropriate to consider the actions of other parties” – especially where non-compliance is the result of failed “due diligence within the wider labour supply chain”.
Where this tax debt is not recoverable from the umbrella company itself, the government proposes enabling HMRC “to transfer an umbrella company’s tax debt to another party in the labour supply chain”.
There are “further indirect benefits” of this approach, with businesses across the supply chain “encouraged to take greater care when selecting the umbrella companies with which they contract”.
“Plenty of recommendations… very little action”
While the news may be cautiously welcomed, Julia Kermode, CEO of the umbrella company compliance specialist PayePass, called the Government’s response “a mixed bag”.
“There are some valid proposals, like ensuring proper due diligence is carried out on umbrella companies and holding the supply chain accountable if they fail to do so.
“But at the same time, the government is putting forward ideas which need real work and threaten how the wider recruitment sector operates.
“It’s taken a year and a half for the government to publish this response, which doesn’t actually resolve any immediate concerns. There are plenty of recommendations being put forward, but very little action.
“The reality is, the longer that the government sits on its hands, the more problems it creates”, she said.
Kermode also pointed out that further delays in consultation and policy roll-out mean more workers will be affected, while “the Treasury also misses out on billions in tax”.
The new consultation – Tackling non-compliance in the umbrella company market – is open until 29th August. Businesses or individuals wishing to respond to this consultation can do so, either via email (email@example.com) or by post. Further details are available on the consultation page.