What might new 'umbrella' legislation look like?
The government today (6 June) issued a summary of responses to the November 2021 call for evidence about "umbrella" arrangements in the UK and a new consultation setting out three options for new legislation.
Summary of evidence
Some key points from the summary of evidence are that:
- The role of umbrellas in making the modern trend worldwide towards gig working function seems to be acknowledged, as it was in Matthew Taylor's report to Theresa May's government. Users of short-term workers just do not want to go through the rigmarole of putting short-term workers on a formal payroll. Let's hope any new legislation finds a way for individuals who move from short assignment to short assignment to build, via something like an umbrella, their own pension and training arrangements and a way of demonstrating to mortgage lenders etc. the consistency of their income.
- The practice of preferred supplier lists, in some cases, being driven by the wish of hirers and staffing companies to get kickbacks/referral fees is commented on, as is the fact that in some cases the umbrellas able to pay the highest kickbacks are the ones with the most aggressive tax avoidance schemes (the savings from which allow the payment of high kickbacks). It seems hard to see how the government can say it is not now on notice of this and we would expect a competent government to now legislate to eradicate that.
- There is a clear need for rules which make all in the supply chain including workers understand what they are being paid and for what.
- Some, but not all, of the difficulties of an outright ban are mentioned. Even if a ban is considered desirable, it seems impossible to define an umbrella for the purposes of such a ban in a way that does not capture "innocent" organisations (including government departments) which second employees to other organisations from time to time. We cannot see how a ban would work.
Consultation raises questions
The consultation, which closes on 29 August 2023, now raises many questions but perhaps the key ones relate to the three options suggested by the government:
- Option one – Mandating due diligence. We are not sure this is the best approach. Our view on this is that it is a better than nothing but that no checks will absolutely eradicate bad practice and we think dodgy umbrellas will continue to operate. And there will be a lot of uncertainties for business as to what does constitute a sufficient check, with the confusion relating to IR35 checks being an example of this.
- Option two – Transfer of tax debt that cannot be collected from an umbrella company to another party in the supply chain. We consider this could work well combined with the licensing regime mentioned below.
- Option three - Deeming the employment business that supplies the worker to the end client to be the employer for tax purposes. This could again work well but does not seem necessarily to address the need for gig workers to have a single umbrella they can work with from gig to gig for the purposes mentioned above. It's also unclear whether this option would involve a move away from umbrella companies acting as the employer and, with it, the removal of umbrella worker employment rights.
Osborne Clarke comment
Will this be the moment that the government also takes forward proposals to merge EASI (the Employment and Social Innovation programme), the Gangmasters and Labour Abuse Authority and the National Minimum Wage team at HMRC? The business secretary, Grant Shapps, was reported in December 2022 to have shelved this plan, but it is hard to see how enforcement of umbrella tax compliance could be fully effective without a single enforcement body. The consultation invites comment on this.
Should the government go as far as introducing a licensing regime with an approach similar to that in the gangmaster legislation? Should end users or staffing companies be penalised for using workers operating via unlicensed or non-compliant umbrella companies? Or will the government merely outsource compliance by introducing (in the form of what is called option two) a regime that makes end users at the top of the chain liable for non-compliance of umbrella companies further down the chain (as with the 2017 and 2021 IR35 regimes) or (in the form of what is called option three) just making the staffing company, which engages workers via an umbrella, liable for tax (albeit outsourcing to the umbrella, which is acting as a payroll bureau, the calculation and administration of payroll and payroll tax). Rightly or wrongly, making risk-averse corporates liable tends to influence the market.
Will the regulator have more resource and greater ability to enforce and punish? How will the government deal with the practical difficulty of needing to investigate each individual umbrella, which, as seen with the pre-2017 and 2021 IR35 regimes, stacks the odds in favour of non-compliance, given the increasing numbers of umbrellas. For example, if there is fraud, the Criminal Finances Act ( or the "corporate criminal offence") already applies but, so far, there has not been much obvious action yet under that legislation. This suggests that a key problem is lack of HMRC resource rather than lack of legislation.