Industry experts submit draft policy, urging government to regulate ‘cartel-like’ umbrella market

Former senior policy adviser to the Treasury, Rebecca Seeley Harris, and founder of offpayroll.org James Poyser, are calling on the government to take urgent action to regulate umbrella companies. 

The pair have submitted a draft policy, titled ‘Umbrella companies – call for regulation’, to Jesse Norman, financial secretary to the Treasury and Paul Scully, parliamentary under-secretary state for the Department for Business, Energy and Industrial Strategy (BEIS).

The policy recommendation states the government “needs to intervene to stop the scandals embroiling the umbrella sector” and provide “much-need protection” for compliant companies and workers.

According to the document, there are currently 500 self-regulated umbrella companies in the UK that manage the payroll for 600,000 workers. 

Mounting evidence of ‘widespread non-compliance’ 

Umbrella companies are a popular way for organisations to engage temporary workers, given the IR35 rules do not apply to umbrella workers.

However, according to the policy draft, there is “mounting evidence of malpractice” and “widespread non-compliance of both tax and employment law”, in the supply chain, which breach workers’ rights.

It highlights some of the malpractices that have occurred, which include, withholding holiday, incorrect payments of Employers’ national insurance contributions, and abuse of the employment allowance tax relief.

In fact, the document states that a “conservative estimate” of the value of unpaid holiday pay to umbrella company workers in 2016 was at least £1.8 billion. This amounts to an additional £300 million that would have been collected by the taxman through Income Tax.

The draft paper also reports that according to the Labour Market Enforcement Strategy 2018/19, an estimated £4.5 billion is “misappropriated” from both workers and HMRC.

Draft proposals will help uphold workers’ rights

The use of tax avoidance schemes, including the so-called ‘mini umbrella companies’ (reported on CW here), is estimated to cost, again both workers and HMRC, £1 billion annually.

Harris, who has drafted the policy, has called on the government to act as a matter of priority and has put forward a number of recommendations.

These include appointing a director of Labour Market Enforcement to provide strategic direction and identify whether to form a Single Enforcement Body (SEB) or expand the remit of the Employment Agency Standards Inspectorate (EASI) to oversee regulation.

Other proposals put forward involve establishing the type of regulation needed in the labour market to ensure compliance, whether umbrella companies and other intermediaries should be licensed and consider if a not-for-profit umbrella co-operatives model would work.

The policy also suggests the creation of an enforcement body to recover holiday pay on behalf of workers.

Harris said the policy proposals will not only ensure enforcement, uphold workers’ rights and prevent tax evasion, but also protect the reputation of umbrella companies that do abide by law.

IR35 reform forcing contractors to use umbrella companies

She said: “I drafted the policy to help the government focus on the task in hand and work with industry experts to ensure any legislation provides robust regulation and protection for workers. 

“It is paramount that the regulation of this industry is expedited because of the rise in the use of umbrella companies as a result of both the Coronavirus pandemic and the off-payroll working rules forcing people through non-compliant umbrellas.

“[…] The issues concerning employment status in the UK are the driving force behind the use of umbrella companies – it is simply irresponsible to let it continue unregulated. I also believe it’s about time the government responded to the Employment Status consultation that closed in 2018.”

Poyser, who is also CEO of inniAccounts, added: “The breadth and scale of the stories of malpractice, scams and skimming are distressing and deplorable. 

“It’s clear that ‘accreditation’ and self-regulation of this market is simply not working, and instead has created cartel-like behaviours and unethical practices. It is a fair and reasonable statement to say that umbrella workers are a revenue-generating commodity for the supply chain to exploit.”

Call for regulation was in the Taylor review

The policy paper has been backed by industry bodies and MPs, including Matthew Taylor, CEO of the RSA, who said: “The regulation of umbrellas is one of a lengthening list of issues that the government needs to address if it wants to apply the principle of levelling up to the labour market.”

Taylor originally called for the umbrella company sector to be regulated in his Review of Modern Working Practices.

Self-employment trade body IPSE has also supported Harris and Poyser’s recommendations. Andy Chamberlain, Director of Policy at the association, said: “The time for much tighter regulation of umbrella companies is long overdue. The recent controversy over mini-umbrellas is the tip of the iceberg. While some umbrellas companies are entirely compliant, many others are not. 

“For years HM Government has been aware of tax avoidance schemes being peddled by umbrellas and highly questionable practices around holiday pay. 

“The cavalier and hasty implementation of the off-payroll working rules in the private sector has pushed yet more individuals into the wild west of the umbrella market, which exacerbated pre-existing problems. Government must address this issue as a matter of urgency.”