The government has released a long-awaited consultation on regulating the umbrella industry. Titled "Tackling non-compliance in the umbrella company market," it addresses employment rights abuses and tax non-compliance by umbrella companies.

According to the initial analysis by the Association of Recruitment Consultancies (ARC), here are the key findings;

The key proposals in the consultation are broad and emphasize transparency. The government suggests two alternative approaches to defining an umbrella company, both of which are likely to cover the intended type of business. However, it acknowledges that one approach may lead to different outcomes for businesses, falling within or outside the definition depending on the scenario. Ensuring clarity in the eventual definition will be crucial to accurately identify umbrella companies.

There is a clear distinction between businesses that offer work finding services and those that do not. Since many umbrella companies provide such services to meet the employment test required for tax reliefs on travel and subsistence payments, this aspect requires careful consideration.

The engagement of workers by employment businesses will be limited to four categories: direct employment, direct contract for services, umbrella company, and PSC (Personal Service Company). Resolving any conflicts between the definitions of umbrella and PSC will be necessary.

Another proposed rule is to allow only one person or business in the supply chain between the employment business and the worker. This measure aims to prevent the involvement of multiple businesses, such as mini umbrellas.

In addition, the consultation considers implementing regulations that mirror the current agency regulations, specifically the Conduct of Employment Agencies and Employment Businesses Regulations 2003, in several areas.

• The proposed regulations state that umbrella companies are obligated to pay workers regardless of whether they receive payment from the employment business, aligning with the obligation of employment businesses to pay workers regardless of payment from the hirer.
• Umbrella contracts should not include conditions that require workers to pay for additional services beyond their margin, where the margin refers to the fee or commission charged by the umbrella company. This provision may be subject to interpretation.
• Umbrella companies must provide accurate information to enable employment businesses to issue a Key Information Document, which is crucial for avoiding disputes in the future.
• If an umbrella company becomes aware of information indicating that a worker is unsuitable for a role, they must inform the employment business. This recognizes that umbrella companies, as employers, may possess information about a candidate that the employment business is not aware of.

Furthermore, the consultation examines the possibility of job adverts being mandated to disclose actual gross pay rates, factoring in overheads like employer NICs that may be deducted from payments received by the umbrella company.

The proposal suggests that the new regulations should be enforced by the Employment Agencies Inspectorate (EAS).

In terms of tax enforcement, the approach seems to involve transferring liability to those who collaborate with umbrella companies, which includes employment businesses and hirers. These ideas aim to bring them into the accountability framework.

• It is proposed that there should be a legal requirement to conduct thorough due diligence to ensure supply chains are protected against various forms of tax non-compliance, including errors. Although it is unclear how one can fully safeguard against errors, the underlying principle is evident.
• A penalty system should be established for cases where due diligence is not carried out.
• The transfer of tax debt owed by an umbrella company to another party within the supply chain is also suggested, drawing inspiration from the Managed Service Company legislation and the recent IR35 rules. This transfer may raise concerns for employment businesses and hirers due to their limited control over the activities of an umbrella company.
• Furthermore, the proposal suggests designating the employment business as the deemed employer of the worker for tax purposes. This would make the employment business responsible for making payments to the worker, aligning with the concept of "deemed employment for tax purposes" seen in the latest IR35 rules. At first glance, this could eliminate the advantages of working with an umbrella company.

Also, the government aims to implement regulations targeting umbrella companies that exploit flat rate VAT schemes, startup employment allowances, and mini umbrella models. These tactics have raised concerns at HMRC due to their association with tax avoidance practices. As a result, HMRC will be granted enhanced authority in these specific areas to address these concerns effectively.

Adrian Marlowe, chairman of ARC commented: “As with IR35 tax, the tool that the government is relying upon to stop non compliance is to impose liability on those who work with umbrella companies, namely the employment businesses and hirers. This will surprise many.

On the face of it the proposals for penalties for not complying with due diligence rules, deemed responsibility for pay, and of course transfer of tax and NICs debt if implemented will likely as a minimum change the demographic and push up cost for both those who choose to continue working with umbrella companies and those who stop doing so. Hopefully the right balance can be struck and at the end of the day there will be room for businesses that provide a genuinely compliant service to the many workers who want to be employed by an umbrella.”

The consultation is due to close on 29th August 2023.