The UK government is facing renewed calls to urgently push through regulation for umbrella companies, following the submission of a draft policy document by a former Office of Tax Simplification adviser that details steps that could be taken to expedite the process.
The Umbrella companies – call for regulation draft policy document has been submitted to HM Treasury and the Department for Business, Energy and Industrial Strategy (BEIS) in a bid to speed up the government’s progress on introducing regulation for umbrella companies.
The document, drafted by Rebecca Seeley Harris, a former senior policy adviser to the Office of Tax Simplification, is intended to provide the government with some clear guidance on how to start regulating umbrella companies and protecting their employees.
“I’m not here to slag the government off or to expose them – I’m just trying to say [with the draft policy]: here is the problem and it needs sorting out,” Seeley Harris told Computer Weekly.
“In my experience, drafting a policy seems to be quite an effective method [to press the government into action], because you’re not just highlighting the problem, you’re providing a solution.”
The problem in question concerns individuals employed by umbrella companies having unexplained and unlawful deductions made from their pay packets, as well as other issues, she said.
“Everyone assumes this is just contractors, but there are some really low-paid people out there who have no clue that they are in an umbrella,” said Seeley Harris.
“And then they’re being told one rate, and when they actually get paid, it’s like hang on a minute, where’s all this money gone? Because there’s no transparency.”
Digging into the policy draft
The draft policy document puts forward a series of proposals it claims would expedite the decision-making and legislative steps needed to start regulating umbrella companies, which is a process that contracting stakeholders have previously told Computer Weekly has been held up by Brexit and the Covid-19 pandemic.
These proposals include an urgent call for BEIS to appoint a director of labour market enforcement, which is a post that has remained unfilled since former Tony Blair adviser Matthew Taylor vacated the position in January 2021.
As set out in the policy paper, without a labour market enforcement director in place, there is “no one providing strategic direction” on pushing through the changes required to regulate the umbrella industry.
The changes detailed in the policy paper include establishing whether the best course of action would be to expand the remit of the Employment Agency Standards (EAS) Inspectorate to include umbrella companies or to establish a single enforcement body to oversee the regulation of these entities.
Both options have already been mooted as a means of regulating umbrella companies in the past, with extending the remit of the EAS Inspectorate proposed in the 2017 government-backed gig economy review that was authored by Taylor.
The single enforcement body approach would see HM Revenue & Customs (HMRC), the Health and Safety Executive, the Gangmasters and Labour Abuse Authority and the EAS join forces to oversee the regulation of umbrella companies.
BEIS launched a three-month consultation on the topic of creating a single enforcement body in 2019, the outcome of which is yet to be made public.
Other proposals the policy paper flags as a “matter of priority” include getting the government to consider whether umbrella companies should become licensed entities, and to ensure that any legislation created to regulate umbrellas also prioritises the protection of workers.
Slow to respond
The UK government has found itself repeatedly accused of failing to act quickly enough to regulate umbrella companies, despite warnings about the proliferation of non-compliant players ahead of the IR35 tax avoidance reforms coming into play in the private sector on 6 April 2021.
When the same reforms were rolled out to the public sector in April 2017, it led to a surge in the number of end-client organisations introducing hiring polices that banned the use of limited company contractors in favour of individuals who provided their services through umbrella setups.
As a result, the number of contractors working through umbrella companies soared, and anecdotal evidence suggests the same has happened now that the same reforms have come into force in the private sector.
With so many contractors now working via umbrella companies, the need for regulation is becoming ever more urgent, said James Poyser, who worked with Seeley Harris on the policy draft, and is the founder of anonymous contractor feedback site Offpayroll.org.
“The umbrella industry has ticked along in the background for years and no one’s really questioned it, and then suddenly there’s lots of people having to work through umbrella companies for the first time. Also, it’s a very different type of person entering the market,” he told Computer Weekly.
“We’ve got some very intelligent and engaged contractors here who can quickly sniff out any problems with umbrella companies that might have gone unnoticed before, and asking lots of questions and requiring second opinions on the pay and treatment they are receiving.”
Poyser added: “We’re seeing hundreds and hundreds of umbrella payslips [via Offpayroll.org] and they show there are some not very nice things going on. Things that might not be unlawful, but they’re certainly unethical and legislation is needed to target some of the problems we’re now seeing.”
As previously reported by Computer Weekly, a series of group litigations are being prepared to reimburse contractors who have had employers’ national insurance contributions at 13.8% unlawfully deducted from their gross pay by umbrella companies.
Some non-compliant umbrella companies are also known to employ disguised remuneration techniques, such as paying contractors in non-taxable loans, to bolster the take-home pay of the individuals on their books, which has resulted in thousands of IT contractors facing life-changing tax bills after being caught in-scope of the UK government’s controversial loan charge policy.
Also, a BBC Radio 4 investigation published evidence in early May 2021 about how mini-umbrella companies are exploiting government-backed small business incentive schemes to artificially minimise the amount of employment tax they pay, resulting in “hundreds of millions of pounds” in lost tax for the Exchequer.
Poyser said that while disguised remuneration and mini-umbrella tax fraud are headline-grabbing stories, there are other dubious behaviours that non-compliant umbrella companies engage in that regulation would also help to stamp out.
“What we’re seeing is really widespread, smaller abuses and