“Cartel-like” umbrella market needs regulation to protect contract workers
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The umbrella company industry requires urgent regulation to protect workers’ rights, a former senior policy adviser to the Office of Tax Simplification has told the UK Treasury and the Department for Business, Energy, and Industrial Strategy (BEIS).

Criticism of the government for its failure to bring forth a new employment bill in last week’s Queen’s speech continues with renewed concern over the “wild west” unregulated umbrella sector which is allegedly costing workers and the exchequer £4.5bn a year.

The covid-19 pandemic, IR35, and the recent off-payroll working reforms have dramatically increased the popularity of umbrella companies that act as an employer for fixed-term contractors in the private and public sectors.

There are around 500 self-regulated umbrella companies managing payroll for 600,000 employees in the UK. However, there is mounting evidence of malpractice within rogue umbrella companies that are breaching workers’ employment rights and failing to comply with tax law.

It is estimated that millions of pounds are misappropriated from workers and HMRC each year through the withholding of holiday pay, making incorrect payments of national insurance contributions, and abuse of employment allowance tax relief.

The value of unpaid holiday pay to umbrella workers in 2016 was conservatively estimated to be at least £1.8bn. The additional income tax collected on this basis equates to £300m.

Further, it is estimated that the use of tax avoidance schemes, including the use of so-called “mini-umbrella companies”, cost workers and HMRC around £1bn annually.

In response to the concerns, Rebecca Seeley Harris, a former senior policy adviser to the Office of Tax Simplification, and James Poyser, founder of offpayroll.org.uk, have drafted a new policy document they hope will be adopted by the government.

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

The document makes several recommendations, including a call for the urgent appointment of a director of Labour Market Enforcement to provide strategic direction on the umbrella sector.

The government is also asked to consider whether the Employment Agency Standards Inspectorate’s remit should be expanded to oversee umbrella industry regulation or a new single enforcement body be formed instead.

The document additionally calls for a consultation on whether the Conduct of Employment Agencies and Employment Businesses Regulations 2003 is the appropriate legislation to regulate umbrella companies.

Consideration should also be given to the licensing of umbrella companies and other intermediaries, and whether there should be not-for-profit umbrella co-operatives, modelling international examples.

New legislation should also ensure the protection of workers’ rights and an enforcement body should be established charged with recovering holiday pay on behalf of workers, mirroring the work HMRC does for national minimum wage contributions.

“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,” said Seeley Harris, who is now chair of the Employment Status Forum.

Seeley Harris added that the new recommendations would ensure enforcement, uphold workers’ rights, prevent tax evasion, and protect the reputation of umbrella companies that do abide by the law.

“The abuses in the labour market supply chain, as a whole, need attention and it may be that the government can look at the bigger picture, including legislation such as IR35 and the off-payroll reforms, because it drives immoral behaviour,” she continued.

“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.”

It is a fair and reasonable statement to say that umbrella workers are a revenue-generating commodity for the supply chain to exploit

Poyser, who is also CEO of inniAccounts, said the government can no longer sit on its hands: “Ahead of new off-payroll reforms coming into force in April, 71% of employees deemed ‘inside IR35’ were moved into umbrellas. 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.

“We have witnessed payslips that don’t reconcile, deductions taken from workers but not paid to HMRC, holiday pay being unfairly pocketed, workers forced to use a single umbrella company with artificially inflated fees and agree to ‘opt-out’ of worker protections. These practices are prolific, including amongst the most well-known ‘accredited’ umbrella companies. Any layperson who lifted the lid on the industry would quickly conclude that this market needs urgent intervention and regulation.”

The Association of Independent Professionals and the Self-Employed (IPSE) has thrown its support behind the proposals, urging the government to step in on the “wild west” of the umbrella sector.

“The time for much tighter regulation of umbrella companies is long overdue,” said Andy Chamberlain, IPSE’s director of policy. “The recent controversy over mini-umbrellas is the tip of the iceberg. While some umbrella 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.”

The proposals have been sent to Jesse Norman, financial secretary to the Treasury, and Paul Scully, parliamentary under secretary of state at BEIS, and shared with the Office of the Director of Labour Market Enforcement and the All-Party Parliamentary Loan Charge Group.

Owen Thompson MP, vice-chair of the APPG, said: “The government needs to act to stamp out schemes as they appear, starting with regulating the sector, to freeze out rogue providers and enforce good practice.”

UPDATE – 20 May – Amendments have been proposed to the Finance Bill by David Davis MP, and supported by Sir Iain Duncan Smith MP and Andrew Rosindell MP, that make specific reference to umbrella companies (See page 23, review of section 21). 

“We acknowledge there are umbrellas that do operate above board and that there is a place for fair umbrellas in the labour supply chain, so a ban as proposed in amendment 34 is, in our opinion, not necessary. However, we believe that without urgent intervention from the government rogue practitioners will continue to abuse workers’ rights and evade tax. As such we support any motion that seeks to bring a stop to unethical practices,” said Seeley Harris and Poyser in a statement.

“Above all, we would like to see tax and employment regulation work in harmony and reflect the flexible way in which people want to work and employers want to hire as outlined in the Taylor Review of Modern Working Practices.”