On 6th June 2023, the government published a consultation on the regulation of the umbrella industry. This is entitled “Tackling non compliance in the umbrella company market” and aims to address employment rights abuses and tax non-compliance by umbrella companies.

The key proposals are relatively wide-ranging and build on principles of transparency. The starting point is to define what is an umbrella company. However, one approach that was suggested could leave a business in one scenario falling within the definition, but in another scenario falling outside of it.

Clarity will be needed around the eventual definition to ensure that a business is correctly identified as an umbrella.

There appears to be a clear distinction between a business that provides work-finding services and one that does not. Given that many umbrella companies offer work-finding services, to meet the overarching employment test required to establish entitlement to tax reliefs on travel and subsistence payments, this aspect will need careful consideration.

Employment businesses will be restricted to engaging workers in four different ways. These are direct employment, direct contract for services, umbrella company and PSC, similar to what they are now. Conflicting definitions between umbrella and PSC will need to be resolved.

The proposed rule is then to be that only one person or business would be allowed in the supply chain between the employment business and the worker. This is designed to stop the engagement of multiple businesses such as mini umbrellas.

The regulations are under consideration are to mirror the current agency regulations, the Conduct of Employment Agencies and Employment Businesses Regulations 2003, in several areas:

1. The umbrella must pay the worker regardless of whether they have received payment from the employment business. This mirrors the obligation of an employment business to pay a worker regardless of receipt of payment from the hirer.
2. Umbrella contracts must not have the condition for the worker to pay for additional services ‘beyond their margin’. The ‘margin’ would be the fee or commission for the service provided as an umbrella company. This could be open to interpretation.
3. Umbrella companies must provide accurate information to enable employment businesses to issue a Key Information Document. This is essential to avoid disputes at a later stage.
4. Umbrellas must inform an employment business if they are aware of information indicating that a worker is unsuitable for a role. This is because umbrella companies, as employers, may be aware of information about a candidate that the employment business is not.

In addition, the consultation considers whether job adverts may be required to identify actual gross pay rates taking into account overheads, such as employer NICs, which may be deducted from monies received by the umbrella.

In terms of tax enforcement, this appears to rely on the concept of transferring liability to others who work with umbrella companies, bringing employment businesses and hirers into the frame.

These ideas are:

1. A statutory obligation to perform mandatory due diligence with the intention that supply chains are secured against tax non-compliance in all its forms including error. It is not clear how you can secure against error, but the principle is clear.
2. A penalty regime where due diligence was not undertaken.
3. Transfer of tax debt owed by an umbrella company to another party in the supply chain. This mirrors the approach taken by HMRC in the Managed Service Company legislation and under the latest IR35 rules. This will be of great concern to employment businesses and hirers given the lack of control over the activities of an umbrella company.
4. Making the employment business the deemed employer of the worker for tax purposes. This would effectively make the employment business responsible for making payments to the worker, following the concept of ‘deemed employment for tax purposes’ contained in the latest IR35 rules. On the face of it, this would appear to rule out any advantage of working with an umbrella company.

Additionally, the government proposes to introduce rules for umbrella companies that take advantage of flat rate VAT schemes, startup employment allowances, and mini umbrella models.

These are the typical devices used by some businesses that HMRC has long been concerned about as being involved in tax avoidance. HMRC will have additional powers around these specific areas.

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.