A regulator that can impose penalties is key to stamping out non-compliant umbrella companies, says industry expert
The recent publication of the inquiry into How Contracting Should Work by the Loan Charge All-Party Parliamentary Group (APPG) raised significant concerns about non-compliant umbrella companies, leading MPs to describe the industry as the “wild west”.
The report argued that recently enforced IR35 reform in the private sector has increased the use of unregulated umbrella companies, which in turn are “exploiting contractors”. It called on the government to intervene and introduce regulation to the supply chain.
While these calls have been welcomed, Jo Harris, Technical-Commercial Manager at umbrella company, Parasol, says the critical nature of the report shines a bad light on compliant umbrella companies.
“They are very negative about umbrella companies,” she says. “I can understand where they are coming from when you look at the context. They are an APPG set up to deal with the people that have been affected by the Loan Charge scandal.
Inquiry fails to recognise place for compliant umbrellas
“Some of these people had some horrific experiences. They were caught up in tax avoidance schemes that had been mis-sold to them or were even oblivious to by umbrella companies, which is absolutely disgusting behaviour.
“But the problem is they are not recognising the place for compliant companies and the work they have done over the years in lieu of regulation – which we have called for.”
Due to the lack of a regulator, a number of companies – including Parasol – set up the membership body, Freelancer and Contractor Services Association (FCSA), and auditing agency, Professional Passport, in order to try and self-regulate the sector.
Through this, the idea of recruitment agencies using a Preferred Suppliers List (PSL) was brought in. However, the APPG report is very critical of PSLs, which Harris says is “disappointing”.
The inquiry states that some recruitment agencies demand “kickback payments” or incentives from umbrella companies for being added to a PSL, such as a one-off fee which could be as high as £40,000, or a rebate for every timesheet processed. This in turn incentives non-compliant providers.
PLS protect contractors and the agency
In some cases, it found that freelancers and contractors were being pushed to use a specific umbrella company and given very little choice. Others have been recommended to use certain providers, which have left them working through disguised remuneration schemes.
“PSL is often set up by agencies to protect themselves from risk under the Criminal Finances Act. It is designed to protect the contractor and the agency and ensure there are compliant processes in place and no money is being paid into a tax avoidance scheme. Therefore, being incredibly critical about it is the wrong way to go,” Harris says.
“PSLs should show contractors that the agencies have done their due diligence on umbrella companies. As part of that process, they should check if they are FCSA accredited or have a professional passport stamp as a base standard,” she goes on to explain.
“Then agencies will look at their level of service. Do they make sure the contractor is paid on time? Do they have access to things like pensions? So, it is a bit of a misnomer the report criticising PSLs – they can be a really positive thing.”
Umbrella industry needs a regulator with ‘teeth’
Harris agrees with the report’s findings that IR35 reform is “undoubtedly” pushing more people into using umbrella companies, adding that “you can’t create a legislation that essentially forces people into an unregulated industry”.
“And shutting down the industry – which the APPG report implies – seems a bit extreme considering there are good providers who understand the benefits of having an umbrella company in the supply chain,” she said.
“We urgently need regulation. We were promised this in the recommendations from Matthew Taylor’s Good Work plan – but we are still waiting.”
One of the recommendations was to expand the remit of the Employment Agency Standards Inspectorate (EASI), which currently regulates employment agencies.
Harris says: “They already understand recruitment and so they would just need to develop an understanding of the supply chain, which could potentially work.
“We need a proper regulator with teeth. They need to be able to impose penalties on non-compliant umbrella companies, or shut them down, or even prosecute them. Right now, all that happens is they lose their accreditation – they can still continue operating.”