Written by JMW Solicitors LLP
On 6th June 2023 the Government announced its intention to publish a consultation on policy options aimed at regulating umbrella companies and tackling non-compliance in the umbrella company market. The consultation, which has been jointly published by HMRC, HM Treasury and the Department for Business and Trade is seeking views from stakeholders on proposals to regulate umbrella companies, as well as options to tackle tax non-compliance.
This consultation has been launched in response to the Government’s Call for Evidence seeking clarity on the role that umbrella companies play in the temporary labour market, which closed in February 2022. The findings of the call for evidence highlighted that many of those who were employed by an umbrella company had very little understanding of the way in which their terms of engagement worked, whilst others expressed that they did not receive or were unaware of their employment rights whilst engaged by umbrella companies. In addition to this, some workers employed by umbrella companies reported that they did not receive the correct payments due to them, whilst others were worried about facing additional tax bills where the company were non-compliant.
Since the Call for Evidence, the Government has attempted to address issues that have been highlighted within the umbrella company market by publishing guidance to assist employees in understanding their engagements. Whilst this has provided some assistance, the Government intends to go further in driving improvement in operation of the market by seeking views as part of its consultation.
The main proposals put forward by the Government’s consultation are:
- Increased regulation on the way in which umbrella companies provide employment rights, with a particular focus on pay and holiday pay.
- Clearer definition of the role that umbrella companies play in the labour market.
- Mandatory due diligence in order to tackle tax non-compliance.
The consultation has identified the regulation of umbrella companies as a two-step process. Firstly, the Government seeks to use primary legislation in order to define umbrella companies, following which it will then consult on specific requirements that will be placed on umbrella companies before these are implemented.
The Government has proposed two options relating to the way in which it intends to define umbrella companies:
Option 1 – Defining umbrella companies and limiting acceptable engagement structures
By using this method, the Government intends to define umbrella companies and simplify methods of engagement that are used within the recruitment sector. The consultation has proposed that umbrella companies be defined in the following way:
- “a person or business (whatever their legal form) who may be
engaged as a corporate work-seeker by the employment
business to employ or engage an individual looking for work”; and
- “the umbrella company would employ or engage that individual
with a view to them being supplied to carry out work for a hirer,
in line with arrangements between an employment business and
Once defined, the Government would then seek to regulate methods of engagement as well as simplifying payment agreements within the recruitment sector by introducing specific models to be permitted for use in the recruitment sector.
Option 2 – Defining umbrella companies by applying three tests
This approach put forward by the Government would look to implement three tests which a company must satisfy in order to be classified as an umbrella company. The Government has proposed the following tests that will be considered when defining umbrella companies under this option.
- In addition to the umbrella company, there should be two separate businesses (an employment business and end client) involved in supplying the worker.
- The umbrella company must have a direct contractual relationship with the worker who is supplied to the end client that requires the umbrella company to pay the worker at the agreed rate. The umbrella company however is not responsible for finding work as this is the responsibility of the employment business.
- The umbrella company receives some form of fee for the services that they provide, which is usually to be deducted from the worker’s gross pay and therefore directly or indirectly makes up part if or the total gross amount received from the employment business. This information should be indicated on the Key Information Document.
In seeking to impose mandatory due diligence, the Government has proposed that penalties will be applied to end clients or employment businesses who fail to comply.
The introduction of a statutory requirement to undertake due diligence will result in penalties being applied to either end users or employment companies for non-compliance. The Government intends for this requirement to place onus on businesses to ensure that labour supply chains are secure against tax non-compliance and will also help to reduce the number of non-complaint umbrella companies in operation.
In promoting these options, the Government has identified three main objectives:
- To improve conditions for workers by reducing the number of non-compliant operators in the umbrella market
- To increase compliance and enable umbrella businesses to operate on a level playing field
- To reduce revenue loss that arises from instances of non-compliance by umbrella companies.
The Government has made it clear that the options proposed are aimed to tackle the main drivers of non-compliance, whilst also striking a balance between the protection of workers, businesses and the taxpayer. At the same time, it intends to protect the flexibility of the labour market and ensure that the impact of any changes do not have a detrimental impact on companies that are compliant.
The consultation is due to close on 29th August 2023.
This article is for general guidance only and should not be used for any other purpose. It does not constitute and should not be relied upon as legal advice.
If you would like to discuss this article or any recruitment issue in more detail, please contact Simon Bloch of JMW Solicitors LLP either by email at email@example.com or by telephone on 0161 838 2628.