The Loan Charge All-Party Parliamentary Group (APPG) have published an inquiry into How Contracting Should Work, which exposes “significant” non-compliance in the supply chain. It also urges the government to rethink IR35 reform – introduced in the private sector earlier this month – arguing that it has “led to the increased proliferation of umbrella companies” that are “all too often exploiting contractors”.
The report goes on to state that IR35 has failed to prevent tax avoidance from so-called disguised employees – instead it has “ironically muddied the waters” and made it harder to “define contracting”.
The inquiry found that some contractors, including instances in the public sector, have been recommended to work through certain umbrella companies which have led them to use disguised remuneration schemes, often without realising.
Other contractors and locum workers were said to be facing a “take it or leave it” situation when it came to securing work, as they were being forced to use a specific umbrella company.
The report also highlighted a “general lack of transparency” over fees and deductions, with some umbrella companies “unlawfully deducting employer’s taxes from contractors’ pay” and others withholding holiday pay from contractors who did not know they could claim it.
Some recruitment agencies were also said to be “ignoring the legal requirement” to provide a Key Information Document to all workers. The report concluded that the “unregulated umbrella market is out-of-control” and is one of the “key reasons for tax avoidance schemes operating”.
It stated: “It is clear the current system of voluntary regulation and accreditation does not stop the facilitation of tax avoidance schemes and does not stop malpractice in the supply chain (by both umbrella companies/payroll intermediaries and also recruitment agencies)”.
The report calls on the government to intervene and address these issues as part of its promised review into supporting self-employment and examine the best way of “organising, remunerating and taxing” this way of working.
It outlines a number of policy recommendations, which include making it unlawful for agencies to receive financial incentives, withhold holiday pay and force or coerce contractors to opt out of the Conduct of Employment Regulations.
The APPG also suggested making it mandatory for agencies to disclose all fees and costs and explain deductions in documents and on payslips. It also takes the view that contractors working inside IR35 should be granted employment rights and benefits.
Ruth Cadbury, Labour MP and Co-Chair of the Loan Charge APPG said: “It is clear from our inquiry that there is significant non-compliance in the worryingly opaque supply chain, which has been dubbed ‘the wild west’ as a result and the lack of regulation enables exploitative practices, as well as enabling promoters of tax avoidance schemes to operate.
“If it is serious about clamping down on tax avoidance schemes, the government must legislate to clean up the supply chain and proactively stop schemes as they start, rather than merely trying to take retrospective action after the event. We also call on the government to commence the review they promised to look at all these issues and how best to recognise and structure contracting and freelancing.”
Andy Chamberlain, Director of Policy at self-employment trade body, IPSE, welcomed the inquiry and its “robust stance on the issue”.
He said: “The report is absolutely right to conclude there is an unregulated ‘wild west’ in this area – which is now more of a risk to contractors than ever as the changes to IR35 force more of them to work through umbrellas and intermediaries.
“We wholeheartedly endorse the report’s calls for greater regulation in this area to protect freelancers and contractors from the pitfalls of malpractice and disguised remuneration schemes. Government must quickly introduce tighter regulations on this sector and ensure nothing like the Loan Charge scandal can happen again.”
In response to the APPG’s report, a government spokesperson told Yorkshire Post that this is a “top priority” and it is looking to establish a “single enforcement body for employment rights” in addition to introducing legislation for umbrella companies.
Building on these points, Joanne Harris, Technical-Commercial Manager at umbrella company, Parasol, said: “I support many of the key findings in the report; for example, the off-payroll reform has undoubtedly been a driver in the use of umbrella companies, an industry which is yet to be regulated despite promises made by government with the publication of The Good Work Plan in 2018 as well as campaigning from FCSA, REC and others.
“In my opinion, this is the fundamental problem that absolutely must be addressed if the government is serious about stopping contractors getting caught up in tax avoidance schemes.
“[…] However, the report fails to provide balance in some key areas. For example, Preferred Supplier Lists (PSL’s) are discussed only in a negative light and linked inextricably to kickbacks, when that is not always the case.
“Most PSLs are driven by compliance considerations to protect the agency workers from non-compliant umbrella companies and tax avoidance schemes, and the agency from risk under the Criminal Finance Act should they fail to prevent the facilitation of tax evasion.”