Tackling Non-Compliance in the Umbrella Company Market

We predict that it may be some time before we hear the outcome of the government’s consultation on ‘Tackling non-compliance in the umbrella company market’ which closed on 29 August 2023. Deliberations on the Call for Evidence in November 2021 took over 18 months before the consultation was released. It is likely that the substantial, and to many, controversial matters involved in creating an effective answer to non-compliance in the industry will take at least as long.

A recap of the consultation's key proposals

Along with output from roundtable meetings with industry stakeholders, HM Treasury and HMRC are considering responses to the 52 questions they posed, together with a large volume of evidence, opinions, viewpoints and ideas on the following key proposals or options outlined in the consultation:

• The definition of an umbrella company
• Mandating due diligence
• Transfer of tax debt
• Deeming the employment business to be the employer

The whole exercise has naturally provoked widespread speculation both in the labour supply sector and outside, as to what form the final recommendations will look like. A complex hybrid is likely, with the protection of the exchequer at its core.

The impact of debt transfer explored

At this stage nothing is known but it is worth agencies and end clients considering the possible impact of ‘Transfer of tax debt that cannot be collected from an umbrella company to another party in the supply chain.’ Along with how it may play out if it becomes part of the government’s solution.

If adopted as a central pillar of change, this decision would be very much in line with the government’s approach to Off-Payroll Working (IR35). Despite its hostile reception by the industry, both HMRC and government have deemed it a success in reducing non-compliance.

We forsee:

• HMRC may find it easier to recover outstanding employment taxes from established businesses (agencies and end clients) if a non-compliant umbrella company is involved.
• Risk-averse agencies will seek out compliant umbrellas and there may be interest in working with those umbrellas who offer indemnities. They will need to be wary of non-compliant umbrellas who flout their tax obligations and leave the agency or end client to pick up the bill.
• It’s likely that agencies will need to ramp up the effectiveness of due diligence on their partners in the supply chain. If due diligence is mandated by the proposals, agencies will need to demonstrate and evidence an effective process.
• Bringing payroll in-house as an alternative to using an umbrella company may cause disruption to the worker’s continuity of employment and loss of accrued employment rights. It will also bring with it additional costs and potential loss of specialist knowledge of payrolling workers held by umbrella companies.
• There may be a levelling of the playing field as both non-compliant agencies and non-compliant umbrella companies are driven out of the marketplace.
• Although only the employment taxes PAYE and NIC are envisioned as transferable under the proposals, VAT may also be included.

In our opinion, the debt transfer option is unlikely to be proposed in isolation and could be accompanied by a registration or licensing system for umbrellas as well as a rigorous due diligence process on the labour supply chain. However, nobody will know for certain until the results of the consultation are published and legislation is drafted.

Over the coming weeks PayStream will be exploring each of the key proposals outlined in the consultation and sharing our views on what they could look like if implemented and the impact they could have.