Umbrella companies could be ‘regulated out of existence’

IPSE highlights concerns over current regulatory proposals for umbrella sector

Contractor lobbying body, IPSE, has highlighted concerns with elements of the government’s proposals to stop tax avoidance in the umbrella sector, suggesting some strands could see umbrellas “regulated out of existence”.

The plans – currently under consultation – are the result of a long-awaited response to a previous consultation. Ahead of its formal response, however, IPSE has posed questions about some of the government’s proposals, indicating that “a highly contentious outcome is not out of the question”.

The umbrella industry has faced intense scrutiny in recent years, with a proliferation of tax avoidance schemes harming workers and contributing to HMRC’s tax gap. Experts say this has been the result of failures to bring in regulatory oversight. 


Proposals need refining to be effective

IPSE has expressed concerns about some potentially unplanned outcomes from these proposals.  

However, it has also stressed that these proposals are under consultation, and each may change or not be taken forward.

One suggestion is to make agencies responsible for deducting employment taxes from the fee paid to the umbrella company. 

In practice, this would require an agency to “withhold an umbrella worker’s tax contributions before then passing the remainder of the worker’s gross pay onto the umbrella company”. Currently, umbrella companies are paid the project fee before deducting the relevant taxes.

But IPSE believes that making the agency responsible for tax deductions would create “confusion” for workers. In addition, calculating and deducting taxes is one of the primary responsibilities of a (compliant) umbrella company. This leads IPSE to pose a rhetorical question: “Would there really be any point in the umbrella being involved at all?”. 

Another proposal that IPSE is concerned about is the transfer of tax debt across the supply chain. This would see the tax debt owed by a non-compliant umbrella transferred to another party in the supply chain. 

The thinking underpinning the suggestion is that this would encourage other parties (like the end client or the recruitment agency) to undertake greater due diligence. Similar tactics are in play under the off-payroll working rules.

IPSE believes introducing tax debt transfers “is certainly an improvement” for workers. But the body states “the perceived risk of a gargantuan tax bill” could dissuade agencies from working with umbrella companies. This would be similar to “the effect of the off-payroll working reforms on clients’ approach to hiring contractors”.

The purpose of the government consultation is to seek feedback from stakeholders, and IPSE’s comments refer to the proposals in their current form. These concerns will be submitted in an official response and can help to ensure there are no damaging or unintended consequences.


Contractor dissatisfaction with current landscape

IPSE’s own research, undertaken in 2023, found that almost three-quarters (70%) of contractors operating through umbrella companies are either “somewhat” or “very dissatisfied” about doing so. The figure was similar (74%) in 2022.

This dissatisfaction is due to the fact that “in general, they are there because their client or agency insisted upon it”. However, IPSE says this doesn’t mean contractors would be better off without umbrella companies. 

Often, an umbrella company is “a vehicle which enables [contractors] to engage on projects they are passionate about”. Meanwhile, agencies “benefit from reduced costs by outsourcing payroll responsibilities” to an umbrella. 

But IPSE has asked if the government’s proposals, in their current form – and well-intentioned as they may be – could “undermine the very rationale” for contractors using umbrella companies.


Consultation deadline looms

The government’s consultation – Tackling non-compliance in the umbrella company market – closes at 11.59pm on Tuesday 29th August. It is currently open to submissions from stakeholders. This includes individual contractors as well as professional bodies.

IPSE is “finalising its response to the full consultation” on behalf of its members. Ahead of submitting its response, the body is hosting a webinar on Thursday 17th August, seeking feedback. You can register for the webinar here. IPSE members can also “shape the final response with their own experiences” during a follow-up focus group on 22nd August.

Anyone wishing to respond to the consultation can do so, either by post or email. Further details are available on the consultation page.

1 Comment

  • Wayne Rozier says:

    ‘could “undermine the very rationale” for contractors using umbrella companies.’ ?
    There is no rationale for contractors to use umbrella companies beyond an obligation forced on them by clients who don’t want to own the risk of being ruled inside IR35 and face penalties. Umbrellas take a cut, the contractor loses out on company pension options and the ability to run their business as a business, charge and reclaim VAT. Ultimately HMRC makes a few £ in NI and Income Tax at the same rate as it would with wages + Dividend Tax after Corp Tax, but looses out on contractor Corp Tax and VAT.
    A classic “cuts nose off to spite face”.

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