Government call for evidence on the role of umbrella companies in the recruitment sector

19 January 2022

On 30 November 2021, the government called for evidence on the role of umbrella companies in the UK labour market. Lee Knight, employment tax specialist, discusses the background and what this could mean for the recruitment sector.

Why is the government doing this?

Data shows that the umbrella company market has grown substantially in recent years.

HMRC estimated that there were 100,000 individuals in the UK employed through umbrella companies during the 2007/08 tax year, but figures for the 2020/21 tax year suggest this had increased to 500,000 individuals.

Despite their popularity, there are real concerns that some umbrella companies have poor market practices, do not comply with tax legislation and employment law regulations, and create unfair outcomes for workers.

What does it mean from a tax perspective?

While this isn’t just about tax concerns, the call for evidence highlights that the government and HMRC are clearly aware of the use of umbrella companies to facilitate ‘tax non-compliance’.

Key tax compliance risks cited include:

the promotion of tax avoidance schemes;
the use of disguised remuneration schemes;
mini umbrella company fraud; and
indirect tax compliance risks relating to VAT.

The government and HMRC appear committed to tackling these issues and minimising tax revenue losses. The call for evidence describes the actions HMRC has already taken to address this issue, but it’s clear HMRC wants to better understand the problem so that its existing strategy for tackling non-compliance and tax avoidance can be complemented.

What is happening?

The government is seeking feedback from a range of stakeholders and interested parties, including end-users, employment businesses, individuals working through umbrellas, and umbrella companies.

As well as highlighting key issues and risks, the call for evidence asks 38 questions. The answers will be used both to shape future policy decisions and strategies, and to identify any required legislative changes.

A summary of responses will be published after the call for evidence closes on 22 February 2022.

What does this mean?

The call for evidence puts umbrella companies in the spotlight, and is welcome because further regulation and better enforcement of existing rules is required for the flexible workforce model to:

operate more fairly;
look after workers’ interests;
reduce tax non-compliance; and
create a level playing field for the sector.

It is also a timely reminder for recruitment and employment businesses to undertake thorough due diligence on the umbrella companies they work with.

Compliant umbrella companies, who play an important part in the flexible labour market, should welcome the announcement as good news, because it highlights the reputational damage being caused to the industry by non-compliant players.