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.”
Intermediary laws are now so ambiguous there cannot ever be certainty over which umbrella structures are “legitimate” no matter who certifies them. Historically even HMRC approved schemes have had participants bankrupted when the revenue returned years/decades later to move the goalposts.
WRT the Loan Charge the myth that such umbrella structures never worked has been repeated by Treasury bosses like Mel Stride, Jon Thompson, Jim Harra and amenable journalists but never in court.
From the Loan Charge APPG enquiry, April 2019:
“It is also clear that both HMRC and HMT deliberately misrepresented the reality of the outcomes of court cases. No court has given the legal basis for the Loan Charge. We are deeply concerned at this cynical and systemic misrepresentation to try to make MPs and journalists believe that court cases have deemed the loans taxable, when that is not the case.”
This conclusion has now been further confirmed by last week’s freedom of information blunder:
“HMRC persistently claims that DR (disguised remuneration) schemes never worked but, despite allegedly challenging DR schemes for the last 20 years, we have not obtained tribunal/court decisions that back up this claim. In particular, we have not obtained decisions establishing that individuals are taxable on DR loans as income.
In recent months I have repeatedly tried to obtain legal analysis to understand the strength of our claim with very little success. For yesterday’s hearing we were initially given a summary of avoidance wins, some of which seemed to have nothing to do with DR.” – Jim Harra, CEO of HRMC, 31 January 2019. email relating to the legality of the Loan Charge
If, as claimed; the DR schemes never worked HMRC would not need the Loan Charge. They needed legislation that blocked access to justice and MP’s were happy to allow this travesty to occur.
A public enquiry is needed now.
What HMRC fail to mention, however, is that the obligation to deduct tax & NIC falls on the payer (typically the employer) & not the employee. Furthermore employees are given a ‘credit’ for this tax, even in cases when it was not paid over to HMRC by the employer.
This has been established by case law in the Rangers case and confirmed in the Hoey case, 12th April, by the Upper Tribunal. HMRC have been exposed prosecuting a punishing war of attrition against its own citizens where 7 of them committed suicide.
I find it amusing that Parasol hold themselves up as a shining example. If they are the best on offer, it’s no wonder the industry is held in such poor esteem.
Check out their recent Trustpilot reviews. In comparison, I got away lightly.
Umbrella structures are so opaque and complicated. If you are coming from Ltd company , then you are more likely to get confused working under Umbrella . HMRC pushed LTD companies into oblivion.
Parasol! what a cheek, they are definitely not a good example of Umbrella companies, perhaps Jo Harris should pretend to be an employee of Parasol and see how long it takes to contact someone from that organization. 4 weeks for me so far.