HM Treasury have opened a consultation on ‘Tackling non-compliance in the umbrella company market’, also publishing responses to their 2021 Call for evidence on the Umbrella company market in general.
At a glance
This latest consultation seeks views on proposals to regulate umbrella companies and tackle non-compliance in the market. This is an issue highlighted by the responses to the 2021 Call for Evidence which took a more general look at umbrella companies, their role in the labour market, and how they interact with tax and employment rights.
Responses to the 2021 Call for evidence
The Call for evidence received over 400 responses, 354 of which came from individual workers but with only two from end clients.
- Respondents using umbrella companies cited the following as reasons for using them:
- The fact that the responsibility for complying with employment law would rest with the umbrella.
- Ease when dealing with workers for short periods and workers inside IR35.
- The main disadvantage highlighted by these respondents was non compliance with tax and employment rules.
- Other areas of concern included pay and rate issues, the need to perform due diligence checks, and preferred supplier lists.
- The majority of respondent workers using umbrellas said they had no option but to use them as it was a requirement of the end client or employment business.
- Workers said they were confused about their pay, had trouble understanding their payslips and were unclear what their employment rights were. Again the use of preferred suppliers was cited as an issue which showed a lack of regards for worker preferences.
- Though generally disliked by both businesses and workers, preferred supplier lists were seen as the best way to prevent non-compliant behaviour, alongside performing due diligence checks.
New proposals
The new consultation seek views on proposals to tackle non-compliance with both tax and employment rights by umbrella companies in line with the governments three main objectives for the umbrella company market which are to:
- Deliver improved outcomes for workers.
- Support a level playing field in the umbrella company market.
- Protect taxpayers from the significant revenue losses that currently arise from non-compliance.
The proposals include:
- Defining umbrella company arrangements as one of four methods of engaging and paying agency workers and make the dividing line between employment businesses and umbrella companies clearer, making it easier to ensure obligations crystalise on the right business at the right point in the supply chain.
- Only permitting four methods of engagement and payment methods. The four methods that would be permitted are:
- Model 1 – the employment business directly employs the individual work-seeker (under a contract of service), and no umbrella company is involved. This model is already covered by the current legislation.
- Model 2 – the employment business directly engages the individual work-seeker (under a contract for services), and no umbrella company is involved. This model is already covered by the current legislation.
- Model 3 (umbrella company model) – the employment business directly engages a corporate work-seeker (which will be an umbrella company) not controlled by the individual doing the work. This lack of control of the corporate work-seeker distinguishes it from model 4 below.
- Model 4 – the employment business engages the individual’s Personal Service Company (PSC), which the government proposes to define narrowly for the purposes of this approach. A business would only be considered a PSC for the purposes of this option if it is under the control of the individual worker and that individual is the only person made available by the company. This model is already covered under current legislation.
- Under each of these four models, only one person or business would be permitted in the supply chain between the employment business and the individual to be supplied to do the work.
- Another approach considered would involve setting three tests, all of which must be met, for a business to be considered an umbrella company. An advantage of this is that it would enable government to be very precise about the businesses to be brought in scope and offer a clear way of targeting the subsequent regulations or standards to the right business at the right point in the supply chain.
- Condition 1 – there should be two separate businesses (an employment business and end client) involved in supplying the worker in addition to the umbrella company.
- Condition 2 – the putative umbrella company has a direct contractual relationship with the individual to be supplied to an end-hirer that makes the umbrella company responsible for paying the individual the agreed rate. But the putative umbrella company is not responsible for providing work-finding services, which remains the function of the employment business.
- Condition 3 – the putative umbrella company receives a form of commission or fee, often referred to as their “margin”, for the service they have provided as an umbrella company. This will most commonly be deducted from the individual’s gross pay by the umbrella company, which makes up part of the total gross amount it receives from the employment business, whether directly or indirectly. This should be indicated on the Key Information Document (KID) if this is to be the case.
- Introducing a mandatory due diligence requirement with penalties for non-compliance.
- Giving HMRC the power to collect umbrella company PAYE income tax and NICs debt from another business in the supply chain.
- This approach would mirror the operation of the existing Agency Legislation in Chapter 7, Part 2 of the Income Tax (Earnings and Pensions) Act 2003. Under this legislation, where a worker is engaged via a series of employment businesses, with no umbrella company, it is the employment business holding the contract with the end client that is the deemed employer for tax purposes.
- Deeming the employment business supplying the worker to be the employer for tax purposes which would in turn require a party further up the chain to operate PAYE.
- It is the government’s view that the most appropriate party to act as the deemed employer would be the employment business which has a contract with the end client to supply the worker to them. This would mirror the existing agency legislation at Chapter 7, Part 2 ITEPA 2003. In the event that an umbrella company was engaged directly by the client, the client would be the deemed employer. Another party which could act as the deemed employer would be the employment business that has a contract with the umbrella company. This would be similar to the approach taken in the off-payroll working rules at Chapter 10, Part 2 ITEPA 2003. Under these rules, the intermediary that pays the worker’s Personal Service Company is treated as the deemed employer, assuming the end client and any other parties in the labour supply have met their obligations under the legislation
- Mandating a UK director to be in place before the Employment allowance can be claimed.
- Measures to prevent abuse of the VAT flat rate scheme.
See the Consultation Questions tab for the detailed list of questions asked. Responses should be sent to
Useful guides on this topic
Starting Work 5. Agency or umbrella tax-avoidance risk
If you obtain contract work via an employment agency you could find yourself accidentally caught up in an illegal tax avoidance scheme. HMRC has now created a basic tool to help you detect whether you are in an illegal scheme.
Spotlight 60: Umbrella companies and tax avoidance
HMRC have released Spotlight 60: 'Warning for agency workers and contractors employed by umbrella companies'. This highlights features of umbrella companies which could indicate that the arrangements amount to tax avoidance schemes.
Spotlight 45: Umbrella companies
HMRC have published a tax Spotlight: ‘Umbrella companies offering to increase your take-home pay’. It highlights the fact that many employees and self-employed contractors are failing to realise that some staff agencies and umbrella companies are flouting tax anti-abuse rules.
Off-Payroll Working: public sector engagers
The 'Off-Payroll Working' rules move IR35: the responsibility to assess a worker's employment status and to deduct Pay-As-You-Earn (PAYE) and National Insurance Contributions (NICs) from a worker's fees, away from the worker's company to the End-Client in the labour supply chain.
Off-Payroll Working: PSCs & Private Sector Engagers
What is Off-Payroll Working? Who does it apply to? What are the rules?
IR35: Off-Payroll
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?
External links
2023 Consultation: Tackling non-compliance in the umbrella company market
2021 Call for Evidence: Umbrella company market: Summary of Responses
Consultation Questions
June 2023 consultation questions
Q 1: Which of the options would be the most effective way to define umbrella companies to ensure only they are brought in scope now and ensure future regulations/standards can be targeted to the right business in the supply chain? Please explain your answer.
Q 2: Which of the definitions would be the most future proof? Please explain your answer.
Q 3: Are there any unintended consequences of either option and/or are there alternative ways of defining umbrella companies the government should consider? Please explain your answer.
Q 4: What aspects of the umbrella company’s role in the supply chain should the regulations cover?
Q 5: Is there a rationale for starting with limited regulations and reviewing them before potentially expanding them to cover other areas of umbrella company involvement? Please explain your answer and illustrate with examples.
Q 6: Are there reasons that the Employment Agency Standards Inspectorate should not enforce umbrella company regulations? And if so, are there other bodies or approaches the government should consider? Please explain your answer.
Q 7: Does the Employment Agency Standards Inspectorate have sufficient enforcement powers to regulate umbrella companies or would changes need to be made? Please explain your answer.
Q 8: Should EAS mirror its current enforcement approach for employment agencies and employment businesses if it enforces umbrella company requirements? Please explain your answer.
Q 9: Do you agree that a requirement to undertake due diligence upon any umbrella companies which form part of a labour supply chain would reduce tax non-compliance in the umbrella company market, and to what extent?
Q 10: Would a mandatory due diligence requirement focused on tax non-compliance also improve outcomes for workers engaged via umbrella companies?
Q 11: Which parties in a labour supply chain should be required to comply with a due diligence requirement?
Q 12: Which due diligence checks are most effective for identifying potential tax non-compliance in labour supply chains?
Q 13: What due diligence checks could end clients or employment businesses be reasonably expected to carry out upon umbrella companies within their labour supply chains? Which tax heads should the checks cover (e.g. employer duties, VAT, Corporation Tax, etc.)?
Q 14: What evidence would you expect would need to be retained, and for how long, to demonstrate that a due diligence requirement has been met?
Q 15: How could a mandatory due diligence requirement be designed to ensure that compliance burdens remain proportionate?
Q 16: What would be the appropriate level of penalty to ensure that the requirement is complied with and how should it be calculated?
Q 17: What safeguards, if any, do you think would be required were a due diligence requirement to be introduced?
Q 18: What impacts would this option have on the labour market and on the umbrella company market specifically?
Q 19: Would this measure lead users and suppliers of temporary labour to move away from the umbrella company model of engagement? If so, how would end clients and employment businesses engage workers instead?
Q 20: Do you have any other comments on the proposal to require a mandatory minimum level of due diligence checks upon umbrella company engagements? In particular, are there any further risks that the government should consider before deciding whether to take this option forward?
Q 21: Do you agree that, were this option to be pursued, it would address tax non-compliance in the umbrella company market, and to what extent?
Q 22: Would this option improve outcomes for workers engaged via umbrella companies?
Q 23: In what circumstances do you think HMRC should be able to transfer an umbrella company’s tax debt?
Q 24: Do you agree that the tax debt should be transferred to the employment business which supplies workers to the end client, with transfer also possible to the end client in certain circumstances?
Q 25: What processes would employment businesses and end clients use to identify tax risks within their labour supply chains?
Q 26: Do you agree that this option should apply to employment taxes as set out above? Which other taxes could or should it apply to?
Q 27: How should the government define the engagements to which this option would apply?
Q 28: What steps should businesses using umbrella companies take to assure themselves that they are engaging with a compliant umbrella company? How could the government support businesses to minimise the impact of these actions?
Q 29: Would businesses stop using umbrella companies as a result of the introduction of a transfer of debt? How many businesses would do this and what wider impacts would there be?
Q 30: What safeguards, if any, do you think should be included if this option is taken forward?
Q 31: Would this option change behaviour of businesses using umbrella companies in the way that the government expects?
Q 32: How likely is it that the temporary labour market would move away from using umbrella companies entirely, were this option taken forward?
Q 33: Are there any further risks that the government should consider before deciding whether to take this option forward?
Q 34: Do you agree that, were this option to be pursued, it would address tax non-compliance in the umbrella company market, and to what extent?
Q 35: Were this option to be taken forward, which entity in the labour supply chain would be best placed to be the deemed employer, and why?
Q 36: How would businesses manage their obligations as deemed employers following this change? What could the government do to support them with these new obligations?
Q 37: Would businesses stop using umbrella companies as a result of this change? How many businesses would do this and what wider impacts would there be?
Q 38: How would the temporary labour market respond to this option being taken forward?
Q 39: Would this option improve outcomes for workers engaged via umbrella companies?
Q 40: Are there any further risks that the government should consider before deciding whether to take this option forward?
Q 41: Are there any other options that have not been covered in this chapter that you think could reduce non-compliance in the umbrella company market?
Q 42: What more could HMRC do to prevent abuse of the scheme? Are there any specific options that you believe the government should consider?
Q 43: What benefits does the scheme currently provide when compared to other accounting simplification measures (e.g. the annual accounting or cash accounting schemes) and, in particular, what additional (if any) benefits are there to those enabled by Making Tax Digital for VAT?
Q 44: What effect, if any, has the ‘limited cost’ test had on your VAT accounting obligations?
Q 45: Do you have any other thoughts you would like to share on the VAT flat rate scheme?
Q 46: Do stakeholders agree, that if this option were implemented, it would help address abuse of the employment allowance?
Q 47: Are there any ways in which mini umbrella companies could sidestep these changes, and if so, how could this proposal be strengthened to reduce or prevent this risk?
Q 48: For limited companies, how would your business be impacted if eligibility requirements were brought in that required your business to have at least one UK director in order to claim or continue claiming the employment allowance?
Q 49: Would there be any barriers to appointing a UK director for those legitimate businesses who do not currently have one in place but who are eligible to claim the employment allowance?
Q 50: Are there any wider benefits, impacts or risks involved with this proposal that have not been identified above?
Q 51: Do stakeholders consider it would be beneficial to amend payroll software to make explicit that a UK director is required at the point of claiming the employment allowance?
Q 52: Aside from the proposed option and wider options discussed throughout this consultation, what more could HMRC do to reduce the abuse of employment allowance?
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