Government plans action on umbrella companies

In June 2023, HMRC released a consultation documentation for ‘Tackling non-compliance in the umbrella company market’.

According to HMRC, the purpose of the consultation was to address the following:

• to deliver improved outcomes for workers
• to support a level playing field in the umbrella company market; and to
• to protect taxpayers from the significant revenue losses that currently arise from non-compliance

This all followed a call for evidence in 2021, which informed the government’s understanding of the role that umbrella companies play in the temporary labour market and the behaviours in the market that were causing concern. These concerns formed a part of the consultation and now the confirmation of a proposed due diligence regime.

What is an umbrella company?

The UK has always had a flexible workforce and a key part of this has been the UK’s 1.7m temporary workers (according to the Office for National Statistics – February 2024), many of whom use employment intermediaries to provide their services.  You are an employment intermediary if you supply workers to work for a client or another employment intermediary and the client then pays you or someone connected to you for the worker’s services.

One such employment intermediary, which has grown in use over the last two decades, is the umbrella company.

While many umbrella companies operate legitimately, those viewed as abusive by HMRC have been known to pay contractors the minimum wage and then supplement each individual’s income (additional remuneration given by way of loans and bonuses, which are often not subject to tax and National Insurance), significantly reducing the amount of payroll tax collected by HMRC.

The usual model for an umbrella company is to employ individuals on behalf of employment businesses (often referred to as recruitment agencies) who are then supplied to end clients. Employment businesses (which usually sit in between umbrella companies and end clients in the labour supply chain) find work for individuals, rather than umbrella companies.

While an umbrella company is the legal employer, the individual does not provide services to or for the umbrella company itself. Umbrella companies must provide individuals with the same employment rights as any other employee (subject to qualifying periods) and must operate Pay As You Earn (PAYE) on any payments of earnings made.

What’s next for umbrella companies?

Last week’s ‘Tax administration and maintenance day’, saw the government publishing a statement confirming that a statutory due diligence regime for businesses using umbrella companies is being considered.  A statutory due diligence regime is one where there is an expectation that minimum checks are made to ensure that the umbrella company are genuine, comply with their obligations and treat their workers fairly and properly.  HMRC will issue further guidance as to what these minimum requirements will be. This will also include penalties for non-compliance.

An online pay checking tool for workers and businesses that use umbrella companies is also being planned. When the tool is released, it is expected that it will be on HMRC’s website and will allow workers and businesses that use umbrella companies to check whether the correct deductions are being made from their pay and to make some of the due diligence checks. The government is planning to liaise with key stakeholders in the recruitment industry to formulate and finalise these plans and we will have to wait and see what the detail is and how prescriptive the checks are.

As mentioned, the government ‘remains concerned about the scale of non-compliance in the umbrella company market, and the detrimental impact that this has on workers, taxpayers and the labour market’. It wants to strengthen protection for contractors who use umbrella companies by creating a legislative framework for reviewing employee pay processes and tax liability. There are plans to regulate the umbrella company market by creating a statutory definition of agencies to ensure they are covered by any relevant legislation.

There is no timeframe for the government to publish its response to last summer’s consultation on the matter, but given this recent statement, we can assume that something will come out soon. It will be interesting to see if there are provisions for the transfer of any tax areas arising from these types of arrangements, from non-compliant umbrella companies to any other parties in the contractual chain i.e. agencies or the worker.

How we have helped umbrella companies

Over recent years, we have advised clients on all aspects of compliance and ensuring that robust systems and processes are in place for any business either using or operating as an umbrella company.

We have supported legitimate umbrella companies in how to deal with the complex needs when operating in this way, ensuring that workers understand their payslips and the arrangements in place.  In addition, we have advised businesses on what needs to be considered when engaging workers via an umbrella company and how to best reduce any risks.

Other areas we have advised on are travel and subsistence payments and how these apply to umbrella companies.

Please do get in contact with the employer solutions team if you have any questions.