Government launches consultation on use of umbrella companies

The Treasury says it is ‘aware of concerns’ that some intermediary firms are breaking employment laws or avoiding paying taxes

The government has launched a consultation on the role of umbrella companies in the labour market following concerns that many of these firms are failing to comply with labour and tax laws.

The use of umbrella companies – which act as an intermediary between temporary workers and labour suppliers – has grown substantially over the last 20 years.

However, the sector is still largely unregulated, and allegations abound of umbrella companies failing to provide employee rights including holiday and sick pay and skimming contractor pay.

The use of umbrella companies has also been linked to tax avoidance schemes, which the government is also consulting on.

The government has said it is launching this consultation to ensure it has a “detailed and up-to-date understanding of the market and how it is continuing to evolve”.

“The government recognises the concerns expressed by parliamentarians and other stakeholders about the risks that abuse of the umbrella company model can pose both to workers and to taxpayers,” the consultation document said.

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It added that it was “aware of concerns regarding non-compliance with employment law, including umbrella companies failing to provide employment rights such as holiday pay, and poor market practices, for example, a lack of transparency over pay rates, fees and charges”.

“This call for evidence is intended to complement the government’s commitment to bring umbrella companies into scope for labour market enforcement,” it said.

Umbrella companies act as go-betweens for many temporary labour suppliers such as recruitment companies. The umbrella company employs the worker, and is responsible for paying salaries, deducting taxes, and paying national insurance and pension contributions.

As the employer, umbrella companies are also responsible for providing holiday and sick pay. However, these companies do not find work for the contractors they employ. This is usually done by an employment business such as a recruiter further up the supply chain.

Dave Chaplin, CEO and founder of IR35 Shield, welcomed the consultation. He said that since the changes to off-payroll rules in the private sector came into force earlier this year – which moved the responsibility for determining a contractor’s tax status to the hiring organisations – many end clients have been making the use of umbrella firms a requirement.

“Our latest IR35 Impact Survey has told us that 88 per cent of contractors who are ‘inside IR35’ are now told they must work via an umbrella firm, but that only 6 per cent of them are happy to use one,” Chaplin said.

He added that there had been a rise in “disguised remuneration” tax-avoidance schemes since the change in the rules. “Worryingly, our survey told us that 78 per cent of contractors cannot detect a tax avoidance scheme from a compliant one,” he said.

“We need to close the door on disguised remuneration schemes, but more importantly on payroll skimming and scamming for other non-compliant ones.”

The consultation is open to submissions until 22 February 2022.