Consultation on umbrella companies is another missed opportunity to align tax and employment law

As the Government  launches its open consultation, ‘Tackling non-compliance in the umbrella company market’, Susan Ball, employer tax partner at RSM UK and the immediate past president of the CIOT (Chartered Institute of Taxation), 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. Now that a consultation has been launched, we could see changes implemented as soon as April 2024. We’d urge employers engaging off-payroll workers, recruiters, umbrella companies and contractors to respond to this open consultation before the deadline of August 29, and be aware of what it could mean for them.

‘It's 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. This could include checks on all taxes - including corporate tax, VAT and PAYE - by all parties who are using umbrella companies in their labour supply chain. With HMRC already struggling under compliance pressures, this begs the question of who will police any new tax additional checks and responsibilities? 

This also feels like another missed opportunity to align tax and employment legal rights and definitions, which would make it simpler for organisations to comply. The emphasis here seems to be on additional regulation to tackle non-compliance rather than tax simplification, which feels at odds with recent statements which have said tax simplification will be embedded at the heart of the tax system as a core HM Treasury and HMRC priority.’  

Charlie Barnes, legal services director at RSM UK added: ‘The Government is also considering regulating umbrella companies in respect of employment law compliance – a step it had already publicly committed to. The aim is to ensure that umbrella companies are complying with their legal obligations to pass on all pay to workers, particularly holiday pay. One of the proposals is 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. 

‘The Government appears 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 it could be looking to make any regulatory changes within the next 12 months. 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. 

‘Those who currently use umbrella companies in their labour supply chain would therefore be well advised to take a moment to respond to the consultation and have their say.’