Off-payroll working rules ‘have increased the risk of rogue umbrella companies’

 The extension of off-payroll working rules to the private sector in April 2021 “appear to have resulted in an increased use of umbrella companies”, increasing the risk of non-compliance by low-income workers, according to the House of Lords.

The rules were brought in for public sector employers on 6 April 2017, and for medium and large-sized private sector employers on 6 April 2021. Also known as IR35, the legislation ensures that workers (or contractors) who would have been an employee if they were providing their services directly to a client organisation will pay, broadly, the same income tax and national insurance contributions as employees.

HMRC says these rules can apply if a worker provides their services through their own limited company, or another type of intermediary to the client. Usually, this intermediary will be the worker’s own personal service company but could also be a partnership or an individual. However, the legislation for intermediaries does not include agencies providing workers, or umbrella companies.

The House of Lords Economic Affairs Finance Bill Sub-Committee said today that it wrote to the government after holding follow-up evidence sessions on the off-payroll working rules in December 2021. The chair of the sub-committee, Lord Bridges of Headley, said: “The whole point of the off-payroll reforms was to crack down on tax avoidance. Yet, as we warned the government in our sub-committee’s report in 2020 [Off-payroll working: treating people fairly], it risks giving rise to a new wave of tax avoidance, as people — many of them on low incomes — end up in rogue umbrella companies. The government must take action to protect workers from ‘rogue’ operators as a matter of urgency.”

“It is right that HMRC commissions external research into the impact of these off-payroll rules, but by only focusing on engagers, it will only get half the story – its scope needs to be widened to include contractors, and needs to be carried out more quickly,” added Lord Bridges.

“The government has said it is committed to fairness in the workplace – however, it is unfair for individuals to be treated as employees for tax purposes without having employment rights. Our sub-committee reiterates the call we made in our 2020 report for the government to press ahead with implementing the proposals set out in the Taylor Review of Modern Working Practices.”

In a letter dated 9 February, Lord Bridges expressed that the sub-committee was “very concerned about the impact that these changes are having on the labour market”, stating: “One of the drivers behind the tax avoidance which the IR35 and the off-payroll rules were designed to address, was engagers’ desire to avoid paying employers’ NICs. Yet in practice it seems many engagers are still not accepting this responsibility, instead passing it on to contractors via reduced rates of pay. It is lower-paid contractors with the least bargaining power who are most disadvantaged … Paradoxically, [the extension of the off-payroll rules to the private sector] appears to substitute one form of tax avoidance for another.”

The letter also called for the government to “commit to a date for bringing forward legislation to create the proposed single enforcement body to regulate umbrella companies” and recommended HMRC worked with the IR35 Forum to modify its Check Employment Status for Tax (CEST) tool, noting that some 20% of employment status cases were unable to be determined by the tool.

Umbrella companies are companies that employ temporary workers or contractors whose services they contract out to client organisations for a fee. In recent years, umbrella companies have come under fire, with press headlines suggesting they may have been involved in disguised remuneration arrangements such as contractor loan schemes, which led to the ‘loan charge’ controversy.

Meanwhile the Trades Union Congress (TUC) found in its report into umbrella companies last July that “people working under these arrangements experience a multitude of problems, ranging from a lack of transparency over core terms and conditions, to unwittingly becoming embroiled in fraudulent tax arrangements, with serious financial consequences”.