Government Launches Consultation on Umbrella Compliance

13 July 2023

The Government recently launched a consultation exercise looking at how to improve compliance in the umbrella industry.

As a recruitment business, you need to know what options are being considered.  Read on for our condensed summary or download our more detailed guide.

In summary…

The purpose of the consultation, which runs until August, is to protect workers’ rights and ensure the right tax is collected when umbrellas are used. It addresses the issue of the legal definition of an umbrella company and seeks to explore whether an agency working with an umbrella should:

  • Have to do more due diligence on the umbrella or face fines;
  • Have to accept debt transfer if the umbrella doesn’t pay the required taxes;
  • Have to be responsible for all taxes from day one by making the agency the employer for tax purposes.

 

It also looks at ways to stop mini umbrella fraud.

The detail…

Broadly, the consultation looks at 4 areas:

  1. How to legally define an umbrella company
  2. Regulatory requirements
  3. Tackling non-compliance
  4. Changes to tax relief schemes (to reduce abuse of Employment Allowance and flat rate VAT scheme by umbrella-style companies that disaggregate into smaller entities also known as mini umbrellas).

Regulation

Regulation focuses on the definition of an umbrella company and consultation after the definition has become law regarding specific requirements to be placed on umbrella companies.

The proposals largely mirror the current operating models of compliant umbrella companies such as Workwell, so would in effect have little impact on compliant umbrella companies and employment businesses.

Tackling non-compliance

The next step is to introduce measures into the supply chain to tackle non-compliance. To do this, the Consultation proposes, and asks questions about, three possible options:

Option 1 – Statutory requirement by employment businesses or end clients to carry out due diligence on umbrellas to ensure they are genuine, comply with their obligations and treat workers properly, with penalties to be introduced for non-compliance. Covers all forms of tax non-compliance including error, avoidance, and fraud.

Option 2 – Transfer of tax debt that cannot be collected from a non-compliant umbrella to another party in the supply chain, ‘the government’s initial view is that it would be most appropriate in the first instance to seek to recover the tax debt from the employment business’.

Option 3 – Prevent umbrellas from handling gross funds by requiring a party sitting above the umbrella in the supply chain (ie employment business) to deduct Income Tax and NICs from the fee paid for the supply of the worker’s services.

This would involve change to legislation to deem another entity, most likely the employment business which supplies the worker to the end client, to be the employer for tax purposes where the worker is employed by an umbrella.

  • Would not prevent employment businesses from engaging another party to run payroll but would stop them being shielded from responsibility.
  • Penalty regime under review along with safeguards for those in the supply chain where non-compliance occurs ‘despite best efforts’.

A greater focus on due diligence will lead to tighter PSLs and greater interrogation of the supply chain.

Changes to tax relief schemes

The consultation is seeking views on how to reduce abuse of the Employment Allowance and flat rate VAT scheme by umbrella-style companies that disaggregate into smaller entities (mini umbrellas).

Mini umbrellas fraudulently exploit the employment allowance by ensuring the company’s employer NICS liabilities are covered by the £5k relief. The move is likely to include a requirement for a UK resident director to be in place for a company to be eligible to claim the employment allowance, removing a large number of individuals based overseas who currently act as directors of these umbrella companies.

No action is required by employment businesses other than to be aware of mini umbrellas and their non-compliant practices though this points, of course, to the need to audit carefully any umbrellas in your supply chain, including any that are not appointed directly by your business.

Our response

As one of the UK’s longest-established umbrella companies, a member of the FCSA since 2012 and with compliance at the centre of everything we do, we are keen to see more done to tackle non-compliant umbrella companies that tarnish our industry. We can support our employment business partners through these changes with:

  • Assurance on the compliance of all our solutions, particularly our umbrella services
  • Supply chain audits, giving reassurance beyond to employment businesses and their clients that the complete supply chain is transparent and operating compliantly.
  • The most comprehensive suite of contingent labour payment solutions. These include alternative solutions to umbrella ie PEO and payroll bureau, giving our partners the greatest choice of options, especially if end hirers begin to mitigate their risk by mandating particular solutions.

 

Find out more

View the consultation document or speak to your Workwell Account Director for more information.

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