Employers to be discouraged from using umbrella companies

A government consultation to tackle umbrella company non-compliance has been called “another missed opportunity to align tax and employment law”.

The open consultation, ‘Tackling non-compliance in the umbrella company market’, was released 7 June jointly by HM Treasury, HMRC and the Department for Business & Trade, and closes 29 August. It includes the government’s response to the call for evidence on the umbrella company market that closed on 22 February 2022. It also sets out proposed ways in which end clients or employers will be held liable for tax avoidance or non-compliance by umbrella companies acting as intermediaries in hiring workers.

Julia Kermode, chief executive of Payepass – a firm that provides umbrella company compliance software – noted it had taken a year and a half for the government to publish its response, but it doesn’t resolve any immediate concerns.

“There are plenty of recommendations being put forward, but very little action,” Kermode said. “The longer that the government sits on its hands, the more problems it creates.”

Susan Ball, employment tax partner at accountancy firm RSM UK, said the issue of tax non-compliance among umbrella companies has “long been on HMRC’s radar, so it’s surprising it’s taken so long to reach this point”.

The consultation “also feels like another missed opportunity to align tax and employment legal rights and definitions, which would make it simpler for organisations to comply,” Ball added.

Three proposed options

The consultation outlines three proposed options:

1. The introduction of a mandatory due diligence requirement, with penalties applying to those employment businesses or end clients that do not comply. The consultation document said this requirement could sit with the employment business or the end client, depending on the specific arrangements of the contract.
2. Legislation to give HMRC the power to collect an umbrella company tax debt from another business in the labour supply chain.
3. Deeming the employment business that supplies the worker to the end client to be the employer for tax purposes – which “would require a party further up the labour supply chain to operate PAYE on payments to contingent workers”, according to the document.

Ball noted that checks on all taxes could be included – including corporate tax, VAT and PAYE – by all parties using umbrella companies in their labour supply chain; though she questioned how HMRC would police any new tax additional checks and responsibilities, given the strain HMRC is under.

She noted that changes could be implemented as soon as April 2024, and urged employers engaging off-payroll workers, recruiters, umbrella companies and contractors to respond to the consultation before the deadline.

Employers should be aware of what the consultation’s proposals could mean for them, saying it was “a lengthy and important document posing some big questions, including defining umbrella companies, transferring PAYE debts, moving responsibility for operating PAYE and mandating supplier due diligence.”

Employment law

Ball’s RSM colleague, legal services director Charlie Barnes, added that the government had already publicly committed to regulating umbrella companies with respect to employment law compliance, aiming to ensure that umbrella companies are complying with their legal obligations to pass on all pay to workers, particularly holiday pay.

Barnes noted one of the consultation’s proposals was to bring umbrella companies within the regulatory scope of the Employment Agencies Standards (EAS) Inspectorate and to introduce civil penalties for non-compliance, making express reference to HMRC National Minimum Wage enforcement; but warned: “Unlike the proposals on tax, it’s not clear from the consultation document whether employment businesses or end users could also find themselves jointly liable for any civil liabilities which would be imposed.

“Even if this is not the case, the additional administrative and compliance requirements of using umbrella companies will likely lead to an increase in costs for both employment businesses and end users,” Barnes said. He added the government appeared to have discounted the option of a single enforcement body “on the basis that there wouldn’t be parliamentary time to legislate for one, indicating that [the government] could be looking to make any regulatory changes within the next 12 months.”

Employment allowance and VAT flat rate scheme fraud

The consultation also invites views on how to reduce fraud in the employment allowance and VAT flat rate scheme, which the document said were “two specific reliefs that are subject to abuse”. It claimed fraudulent umbrella companies targeted both schemes to benefit from lower levels of employer NICs and VAT.

“The employment allowance is exploited by umbrella companies that artificially disaggregate to ensure the company’s employer NICs liabilities for the year are covered by the £5,000 allowance meaning no employer NICs is paid,” the consultation said, adding that “the same entities” defraud the VAT flat rate scheme to exploit the different VAT rates available.

The consultation document added that HMRC had de-registered “tens of thousands of umbrella companies” it believed were involved in abusing “either or both of these schemes”, and that the government was considering further action to combat this. It invites views on the benefits of the flat rate scheme and what the government could do to prevent its abuse – as well as setting out a proposal to mandate a UK director to be in place for a company to be eligible for the employment allowance.