On 10 February 2022, Lee Knight, employment tax specialist at RSM, chaired a roundtable to discuss the call for evidence on the role of umbrella companies in the labour market which was attended by RSM clients and contacts representing the recruitment sector, and representatives from HM Treasury, HMRC, and BEIS. The event highlighted some interesting reactions and themes.
Why was the call for evidence on umbrella companies published?
The call for evidence on the role of umbrella companies in the labour market was published on 30 November 2021 and closed for responses on 22 February 2022.
It invited views from stakeholders and interested parties on the role that umbrella companies play in the labour market and how they interact with tax and employment rights systems. It also highlighted concerns about non-compliant umbrella companies, particularly around tax non-compliance and the protection of workers. Its purpose was to gather views and feedback from stakeholders in the labour supply chain, including clients, employment businesses, workers and umbrella companies.
It was essentially a fact-finding exercise to provide the government with information to better understand and take future steps to improve regulation in the umbrella company market.
How have stakeholders reacted?
The call for evidence was generally well received by our recruitment sector representatives at the roundtable.
They expressed the view that compliant umbrella companies play a vital role in the labour market. By using the same compliant umbrella company for their temporary appointments, workers can benefit from continuity of employment and the assurance that income taxes and National Insurance Contributions (NIC) are being correctly applied and paid to HMRC.
For that reason, the use of an umbrella company is often driven by the worker. It could also be the preference of end clients or employment businesses, especially since the introduction of the reformed IR35/off-payroll working rules from 6 April 2017 and 6 April 2021.
Our recruitment sector representatives all agreed there is a place for well-run and compliant umbrella companies in the labour market. They additionally agreed that the government should take appropriate steps to regulate the umbrella market and target non-complaint umbrella companies to protect workers and address tax non-compliance.
What other key themes were highlighted?
A point strongly emphasised by our employment business representatives was that they are already undertaking time consuming initial and ongoing due diligence to on the umbrella companies they are working with.
Given the level of due diligence involved, this effectively limits the number of umbrella companies they can realistically work with. It means that many employment businesses have established approved umbrella supplier lists containing only a small number of umbrella companies they are comfortable working with. This often includes umbrella companies that are FCSA accredited or are one of APSCo’s Trusted Partner umbrella companies.
This initial and ongoing due diligence was seen as an essential process to identify non-complaint umbrella companies, to manage financial and reputational risks, and avoid issues for both the employment business and the worker.
There were concerns raised that regulating the sector further, while generally welcomed, might result in recruitment businesses having to undertake even more time-consuming due diligence to police and spot issues in their supply chain. As a result, the preference was for the government/HMRC to introduce an umbrella company verification scheme where umbrella companies are essentially vetted and approved by the government/HMRC. This government/HMRC verification scheme could also help employment businesses expand the number of umbrella companies they can work with and therefore better support workers with continuity of employment.
There was also a strong feeling that best practice on working with umbrella companies could be better publicised by the government. In addition, there should be better publicity in spotting non-compliance and unethical practices, as this is a technically complex area.
There was a concern that smaller recruitment companies may not have the in-house expertise to undertake the due diligence steps that larger employment businesses adopt and may not fully understand the risks. Better publicity on all the risks and issues to look out for could address this.
Were any other comments made?
It was noted by our umbrella company representative that none of the specific questions asked in the call for evidence appeared to be aimed directly at umbrella companies. HMRC responded to this observation by saying that they were open to all views and that feedback from umbrella companies was important to them.
Many representatives said that the significant increase in the use of umbrella companies in recent years had been a reaction to the changes to the IR35/off-payroll working rules in April 2017 and April 2021.
Under IR35, the end-client is often not prepared to take on the risk of assessing status incorrectly under IR35. So umbrella companies were being used more widely to employ workers rather than engage workers via their own intermediaries and limited companies.
Due diligence is hugely important
The call for evidence clearly highlights the need for employment businesses (and any client using temporary labour) to spot the dangers of using umbrella companies that are not tax-compliant and/or operate unethical practices. Inadvertently using a non-compliant umbrella company can lead to reputational and financial damage.
For example, for tax purposes, if an employment business uses a non-complaint umbrella company that operates a tax avoidance scheme, the employment business using it could potentially incur a financial penalty for otherwise enabling the use of a tax avoidance arrangement. HMRC may also be able to publish the name of the employment business as an enabler of a tax avoidance scheme.
Another example is where an offshore umbrella company is used. A UK employment business can be responsible for operating PAYE on payments made to a worker engaged by an offshore umbrella company under the offshore employment intermediaries rules. This means that a UK employment business may be liable to pay unpaid income tax and NIC if the offshore umbrella company doesn’t pay this and/or is involved in the use of a tax avoidance scheme. We have seen examples in the past of offshore umbrella companies taking steps to disguise the fact that they are offshore by placing a UK company in the labour supply chain between them and the employment business.
If you would like to discuss any queries arising from the call for evidence or the use of umbrella companies, please contact Lee Knight.