Is the umbrella company industry going to be regulated (finally)?

The government has published a consultation on proposals to tackle non-compliance in the umbrella company market. Now used by 500,000 people in numerous types of roles, it seems incredible that there is neither a legal definition of what an ‘umbrella company’ is, nor regulation of the industry itself.

Why now?

Umbrella companies have been operating since 2007, when the MSC legislation outlawed the use of composite companies as an employment model.

The market has thrived ever since, although demand for umbrella services has mushroomed since the implementation of the ‘off payroll working’ rules in the private sector in April 2021.

Many end-clients have blanket banned the use of limited company contractors – leaving many to either shun ‘inside IR35’ roles, or use umbrella companies.

Unfortunately, contractors will be aware that there have been several high-profile cases of rogue umbrella companies over the past year or so – whereby firms have either ‘skimmed’ workers’ salaries via hidden charges, pocketed holiday pay, or more serious cases of fraud – including the creation of so-called ‘mini’ umbrella companies.

Multiple cases of rogue practice, coupled with the increasing number of umbrella employees has finally resulted in the Treasury taking action to clean up the industry.

Although the consultation document stops short of suggesting that umbrella companies could be ‘outlawed’, the Treasury clearly wants to strictly define what an umbrella company is to prevent rogue firms bypassing any new regulations in the future.

Three main aims for the future of umbrella companies

The consultation seeks views on three main options for reforming the sector:

• Due diligence: This option would require recruiters or their clients to carry out checks on umbrella companies before using them. The checks would include looking at the company’s financial records, its history of compliance with tax and employment law, and its complaints record. Recruiters or clients who fail to carry out due diligence would face penalties.
• HMRC collection powers: This option would give HMRC the power to collect unpaid tax from another business in the labour supply chain if an umbrella company fails to pay its tax. This would mean that recruiters or their clients could be held responsible for the tax debts of the umbrella companies they use.
• Treating recruiters as employers: This option would treat recruiters as the employer for tax purposes, even if they use an umbrella company to perform the function. This would mean that recruiters would be responsible for paying the workers’ wages, deducting tax and National Insurance contributions, and providing holiday pay.

Key concerns about the umbrella company market laid bare

The government’s consultation follows a call for evidence that closed in February 2022. The call for evidence found that there were numerous concerns about the umbrella company market, including:

• Non-compliance with tax and employment rules.
• Issues around pay leading to dissatisfaction among workers.
• Jobs advertised at a higher rate than the rate ultimately received by the worker.
• Pay structure problems fuelling issues for workers seeking to prove their true pay level.
• Preferred supplier lists (PSLs) created a closed shop by denying some umbrellas access to the contingent labour market.
• Difficulties by workers in understanding payslips.
• A lack of transparency on pay rates, fees and charges.
• Workers unsure who was responsible for their pay, employment rights and employment status.
• Requests for introducing limits over umbrella companies charges.
• Disguised remuneration tax avoidance and fraud.
• Umbrella companies failing to provide employment rights such as holiday pay.
• Evidence of tax fraud through mini umbrella companies.

What happens next?

The consultation is open until 29th August 2023. The consultation will run for 12 weeks and the government is expected to publish its response in the autumn.

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