What to consider with increased regulation in the Umbrella Sector

The Government has been engaging in consultations to explore policy options for regulating umbrella companies and addressing non-compliance within this sector. It is possible that they may announce measures during the Autumn budget in November.

This development signifies that HMRC recognises the importance of umbrella companies in the market but is concerned about the unethical practices and tax avoidance schemes that are prevalent amongst some players.

One option HMRC is said to be considering is to encourage the recruitment industry and labour supply chain entities to self-regulate by introducing debt transfer provisions. This would mean that if an umbrella company fails to pay appropriate taxes, the liability can be transferred up the supply chain to the recruitment agency and client. This will increase the risks associated with engaging with workers through the umbrella model. In theory, recruitment agencies and clients can only mitigate their risks and exposure by conducting thorough due diligence on their umbrella partners, which will result in reduced tax avoidance and increased compliance.

The financial exposure to organisations could amount to approximately 46% of their contractor spend.

What steps can end-clients and recruitment businesses take to combat this risk?

1. Understand your labour supply chain and don't assume that everyone is acting as they should.

2. Limit the number of umbrella companies you use and establish a Preferred Supplier List ("PSL").

Considerations for your PSL should include:

(i) Retaining the right to audit the umbrella companies and regularly reviewing your PSL.

(ii) Ensuring the umbrella company is a member of industry bodies such as FCSA, Professional Passport or APSCo.

(iii) Checking contracts of employment and contracts for services, ensuring that the umbrella entity and address are consistent on both.

(iv) Examining payslips to ensure that take-home pay aligns with your internal calculations after relevant deductions.

Potential 'Red Flags' that should not be overlooked are:

(i) Offshore payments.

(ii) Is the provider is on the HMRC "named and shamed" list (https://www.gov.uk/government/publications/named-tax-avoidance-schemes-promoters-enablers-and-suppliers/current-list-of-named-tax-avoidance-schemes-promoters-enablers-and-suppliers).

(iii) Identifying a lack of transparency in relation to payments and processes.

(iv) Being mindful of overinflated fees and "kickbacks."

IR35 off-set mechanism

In April 2024, in addition to potential compliance measures related to Umbrella Companies, we anticipate that HMRC will introduce the long-awaited IR35 offset mechanism. This mechanism will allow organisations to offset taxes already paid when HMRC determines that a client has incorrectly classified a role as Outside IR35.

This is much welcomed news for the market as it has the potential to reduce the tax risk associated with engaging contractors on an Outside IR35 basis.

With regulations being tightened in both the Contractor and PAYE sectors, there is renewed hope that this will help rebalance the market after many contractors were pushed into umbrella models following the 2017 and 2021 IR35 reforms.