The government has published its response to the umbrella company consultation and has subsequently launched another consultation putting forward possible solutions to stamp out non-compliance across the sector.
The response was published on 6th June, following 18 months of near silence from the government on umbrella regulation. As a result, it gives some indication of how the government plans to police compliance in the sector – though it stops short of offering concrete plans.
Since the introduction of the off-payroll working rules, there has been a proliferation of tax avoidance schemes posing as compliant umbrella companies.
In the government’s consultation response, a number of proposals have been made to stop these schemes and ensure fairer working practices in the umbrella industry.
One of the first challenges the government faces is introducing a legal definition of umbrella companies. Its response proposes two ways to achieve this, though it also identifies that “there are advantages and risks to each of the options”.
One solution proposes introducing a statutory definition which would “explicitly state” how umbrellas operate. Alternatively, the government suggests using three tests; businesses which satisfy all three conditions would be considered umbrella companies. This would “bring businesses in scope based on the nature of their activity, not corporate set up”.
Only when umbrella companies are defined can government introduce and enforce regulation. It proposes “expanding the remit” of the Employment Agency Standards (EAS) Inspectorate, which “already regulates the recruitment sector” and could enforce compliance among umbrellas.
This proposal is one way that the government wants to tackle “structural challenges” around tax non-compliance in the industry.
The idea will be familiar, too; it was “previously considered” as a mechanism to ensure that “individuals working via their own Personal Service Companies were complying with the intermediaries legislation”, prior to IR35 reform in the public (2017) and private (2021) sectors.
The proposal has been reshaped for the umbrella industry, however, and has become “a broader due diligence requirement… which operates in a substantially different way”.
This could entail “a statutory requirement to undertake due diligence”. The expectation is that this would lead to more businesses securing “their labour supply chains against all forms of tax non-compliance, including error, avoidance and fraud”.
Another option put forward is the transfer of tax debt up the supply chain. Again, this will be familiar; the government introduced similar measures as part of the off-payroll working rules.
In the umbrella sector, HMRC experiences “difficulties” when recovering unpaid taxes from non-compliant firms, due to “the low level of capital held by umbrella companies”. As the report acknowledges, “this can mean that the only avenue possibly available to collect any resultant tax liability is directly from the worker”.
This leads to individuals footing the bill, rather than the operators or promoters of the tax avoidance scheme.
To resolve this issue – and to ensure it can collect all the taxes owed – the government suggests it “could legislate to give HMRC the power to transfer an umbrella company’s tax debt to another party in the labour supply chain”.
The “direct impact” of such a measure would be to “help HMRC to protect payroll taxes which are currently unpaid” as a result of non-compliance and avoidance within the sector.
The government also believes that this proposal could help deliver “changes to market behaviours”, leading to “a reduction of non-compliance” across other tax revenues, including VAT.
Alongside these general measures to reduce tax non-compliance, the government response outlines “targeted options” to solve “the abuse of specific tax reliefs by some umbrella companies”.
Overall, the response puts forward several progressive proposals, which will offer some reassurance to umbrella workers.
With a number of non-compliant tax avoidance schemes operating in the industry, those contractors who found themselves pushed into working via umbrella companies as a workaround to the off-payroll working rules may find themselves exposed to new risk.
As such, the proposals outlined above are a step in the right direction. But as of yet, no action has been taken. The feedback the government receives may determine which elements of each proposal are taken forward or redesigned.
Businesses and individuals are invited to respond to the consultation to help shape the proposals and the eventual policy direction.
Take a look at the consultation page for further details on how to respond.
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