The ongoing consultation on the regulation of the umbrella industry includes proposals which could have a significant effect on the business operations and potential liabilities of employment businesses (EBs) that work with umbrella companies.

EBs could be
1. required to carry out mandatory due diligence on umbrella suppliers and, if failing to do so, face penalties based upon either fixed sums or a % of tax revenues

2. potentially liable for the tax debts of an umbrella, which HMRC is unable to recover, whether the EB has been involved or otherwise

3. the EB is to be the deemed employer of the umbrella worker for tax purposes and therefore have direct responsibility for treating such payments as employment income

“There are various problems with this approach,” says Adrian Marlowe, CEO of the recruitment law specialist Lawspeed and Chair of the Association of Recruitment Consultancies (ARC). “For example, the name of the consultation is misleading. There are no immediate proposals for regulating umbrella companies, instead, the primary proposals are for the tax debts of umbrella companies to be transferred to the recruitment agencies that work with them. The name may inadvertently result in agencies believing that the consultation is not relevant to them when, in fact, it is directly relevant to any supply agency that works, or plans to work, with umbrella companies.”

The proposals are in three parts and are dependent on the definition of an ‘umbrella company’. “The draft definitions fall short”, says Marlowe, “and in particular only encompass the position where an umbrella company is working with an employment business. This means that an umbrella company is within the definition if it works with an employment business, but outside the definition if it works directly with a hirer. It is not at all clear what the thinking is behind this approach which appears to bizarrely encourage direct hirer to umbrella company relationships. Understandably these proposals have raised concerns. If enacted, they could result in the end of the umbrella industry as we know it.”

At a recent seminar held by Lawspeed, and attended by representatives of the relevant government departments (HMRC, HM Treasury and DBT), the general consensus was that whilst there was a need for regulation in the umbrella market and a more level playing field to prevent undercutting, the proposed measures place too high an administrative and tax burden on EBs. The plan for due diligence lacks certainty or details, the proposed tax liabilities obviate the advantages of working with an umbrella, and the outcome could be to limit choice for workers.

A better way

ARC proposes an umbrella registration scheme funded by those umbrella companies that want to register but is run by government operatives to avoid conflicts of interest arising. Scheme details would be as follows
• Registration would be voluntary
• Applicant umbrella companies would need to meet criteria in all the critical areas that have caused problems for contractors, agencies and HMRC
• Applicants would pay a fee that is sufficient to operate the scheme, including complaints handling, so resulting in no cost to the government
• Employment businesses (and hirers) would be prohibited (in regulations) from contracting with any umbrella company that is not on the register

Marlowe continued “The scheme would allow clear oversight on the umbrellas and their operations without the need for repetitive due diligence by agencies. It would allow complaints and employment non compliance to be identified and addressed quickly and fairly, identify tax failure early on with rapid results such as removal or suspension from the register, and ultimately sort the good from the bad. As for funding, some umbrellas already pay considerable amounts to be accredited by trade bodies and schemes, so the principle of payment for verification is already in place.”

The decision to adopt this proposal as part of ARC’s response to the consultation follows a discussion with the government representatives at the Lawspeed seminar, in which the vast majority of attendees indicated their agreement. It is hoped that the other recruitment trade associations and hirers, who could also be affected, will support the proposal also.

Marlowe concluded “The fact that there is a consultation now and a determination at government level to regulate the umbrella marketplace shows the scale of the problems that have emerged over many years and that existing self-regulation and privately operated accreditation schemes simply have not achieved the necessary compliance outcomes. In our view, a government run scheme is the only viable alternative which could guarantee a level playing field for all, provide certainty, and reduce non compliance to the maximum. Crucially, the concept would protect candidates’ interests as well as payments to HMRC, and would allow agencies to focus on their core business activity of supplying workers and contractors.”

If you agree with the proposal and would like to support ARC’s initiative, whether you are a contractor, agency or hirer please email us at inserting “I support the umbrella registration scheme” in the subject line.