The government’s stance on the umbrella industry is that it needs cleaning up. In its latest consultation on tackling non-compliance in the umbrella industry, it reported that HMRC has “deregistered tens of thousands of umbrella companies” who it believes were involved in exploiting either or both the VAT flat rate scheme and employment allowance.
If there were that amount of umbrellas defrauding the government, arguably, they might not have had inhibitions in defrauding contractors at the same time.
However, despite this revelation and the consultation, it’s looking like most of the non-compliance risk will still land on clients and recruitment agencies, according to IR35 and Off-Payroll experts.
There are “no surprises” in the government’s response and subsequent consultation on umbrellas, according to Dave Chaplin, CEO of contracting authority ContractorCalculator.
Chaplin says it is good to hear that the Government is” stepping in to clean up” an industry that “harbours a murky side, giving the whole industry a bad name.”
The government’s call for evidence report on umbrella companies had stated that “an accreditation is not a guarantee of compliance.”
One observation by Chaplin is that the consultation document suggests that a “behavioural effect to policing” will be used, whereby “clients and agencies in the supply chain will be saddled with liability” if an umbrella fails to process payments correctly.
In Chaplin’s estimations, “That’s a sensible idea.”
Where any Tom, Dick or Harry can set up and run an umbrella. What did the Government think would happen?Dave Chaplin, ContractorCalculator
Left with a breeding ground for non-compliance
“After the IR35 reforms reached the private sector in April 2021, we now have billions of pounds being channelled to workers via unregulated mechanisms, where any Tom, Dick or Harry can set up and run an umbrella. What did the Government think would happen?” he asks.
“HMRC has inadvertently created a breeding ground for non-compliance where unscrupulous operators seek to enter the supply chain and siphon off monies that should be going to either HMRC or the worker,” says Chaplin.
Continuing he says, “Those that are most successful can afford to pay agencies the most in commissions, driving the compliant umbrellas out of the market.”
Chaplin believes the lack of visible enforcement by the authorities, combined with HMRC chasing the workers for the lost money “many years later”, only encourages the most egregious schemes more.
“It doesn’t matter how big HMRC makes the stick if they never whack anyone with it,” he says.
There are plenty of recommendations being put forward, but very little action. The reality is, the longer that the government sits on its hands, the more problems it creates.Julia Kermode, CEO, PayePass
Government response doesn’t “resolve any immediate concerns“
Julia Kermode, recently hired CEO of umbrella company compliance specialist PayePass, sees the latest government efforts tackling the unregulated umbrella industry in its consultation as a “mixed bag.”
“There are some valid proposals, like ensuring proper due diligence is carried out on umbrella companies and holding the supply chain accountable if they fail to do so,” says Kermode. “But at the same time,” she says, “the government is putting forward ideas which need real work and threaten how the wider recruitment sector operates.”
Kermode says that despite it taking 18 months for the government to publish this response, it doesn’t “resolve any immediate concerns.”
She says, “There are plenty of recommendations being put forward, but very little action. The reality is, the longer that the government sits on its hands, the more problems it creates.”
Kermode points out that the HMRC has admitted that the majority of disguised remuneration tax avoidance schemes operate within the contracting sector. Some of the schemes masquerade as compliant umbrellas, posing a “huge personal financial risk to over 500,000 people working in this way – some of whom have no choice about their umbrella,” says Kermode.
Kermode is still concerned that not only are innocent workers affected, but the Treasury also misses out on billions in tax due to these immoral schemes.
It is vital that the Government, accreditation bodies, clients and recruiters now work together.Crawford Temple, CEO and founder of Professional Passport
Is collaboration the answer?
Commenting on the findings and the new consultation opened into tackling non-compliance, Crawford Temple, CEO and founder of Professional Passport, an independent assessor of payment intermediary compliance, says it is vital that the Government, accreditation bodies, clients and recruiters now work together.
“There is a lot of work to be done, specifically in the areas around due diligence and debt transfer as one example, and we would urge HMRC to take us up on our suggestion to form a working group of experts so that together the industry can move forward for the better and benefit of our sector,” says Temple.