Campaigns propose new rules to protect contractors from rogue umbrella companies

Updated Campaigners and MPs are urging UK government to introduce legislation to stop umbrella companies siphoning off contractor pay through a range of sharp practices.

With the introduction of new IR35 rules, the UK has seen an upsurge in umbrella companies as employers and temp agencies seek to avoid directly employing contractors judged to fall within the tax law.

While many umbrella companies work well, James Poyser, CEO of inniAccounts and founder of campaigning website offpayroll.org.uk, said the flood of new contractors into umbrella companies was exacerbating problems with a largely self-regulating system.

“There's lots of people now using umbrellas for the first time, 600,000 of people in the UK use them. It's an unregulated industry and the legislation for umbrella companies is really weak. There are parts of it where you get some protections but the other parts, it’s just open to the wolves, basically, and umbrella companies are very commercially driven organisations,” he told The Register.

New IR35 rules introduced last month require medium and large employers to assess whether contractors meet HMRC's definition of self-employment. The reforms made the businesses responsible for determining the tax status of contractors, rather than the contractors themselves, and many put in place blanket-ban policies for techies employed via their own personal service companies (PSCs).

Contractors judged to be inside IR35 under the new rules often end up employed by umbrella companies. Umbrella firms take the untaxed income from an employer or agency and run the payroll, hand over the taxes and national insurance to the UK's tax collection agency, HMRC, and pay the net pay to the contractor. Among the dubious practices employed by umbrella companies, which offpayroll.org.uk has seen evidence of, are attempts to impede holiday pay or entitlement and adding hidden fees to payslips.

Tricks of the intermediary firms

While umbrella companies are meant to hold back a percentage of pay in lieu of holiday pay, sometimes when the contractor leaves the company before the holiday is taken, or has not taken all the holiday before the end of the year, that payment is not returned to them or is carried over to the following year, Poyser said. Some umbrella firms even try to wait until they cannot be challenged for the pay within the law, he said.

"By law, umbrella companies have to repay any unused holiday pay, but some wait three months until they repay you, and then short-change you. And the reason why is because, after three months, the workers aren't entitled to go through the Employment Tribunal process directly: [Umbrella companies are] allowing themselves to operate outside the law," Poyser said.

Another approach by some unscrupulous firms is to siphon off pay with hidden fees. "You might see one line that would say employment costs, and there are no details behind it. It might include national insurance and other things they have to take, but then if you run the numbers backwards, that number is too large... they're taking too much and they don't say what's going on," Poyser said.

As in holiday pay, the individual sums may not be much to an IT contractor on £500 a day. But they add up and point to how badly the system is working.

It was estimated in the Labour Market Enforcement Strategy 2018/19 that £4.5bn is misappropriated mainly from workers but also from HMRC in the sector of employment agencies and intermediaries. For example, in 2016 a conservative estimate of the value of unpaid holiday pay to umbrella company workers was at least £1.8bn.

The proposals

Poyser has joined forces with Rebecca Seeley Harris, chair of the Employment Status Forum and a leading expert on employment and tax status, to submit a draft policy entitled "Umbrella companies - Call for Regulation" to Jesse Norman, the financial secretary to the Treasury, and Paul Scully, the Parliamentary under secretary of state in the Department for Business, Energy and Industrial Strategy.

The proposals are backed by Labour MP Ruth Cadbury and Liberal Democrat member of the House of Lords Matthew Taylor.

The policy proposals include the appointment of a director of labour market enforcement as a matter of urgency and identifying whether to form a "Single Enforcement Body" or expand the remit of the Employment Agency Standards Inspectorate to oversee the regulation. They also include considering whether the umbrella companies and other intermediaries should be licensed.

Speaking to The Register, Seeley Harris said: "Workers have nowhere to turn at the moment. They have to go to an employment tribunal, they've got no government body to go to complain. There's nothing for the workers. The worker needs supporting, I know we need regulations, and maybe licensing... and perhaps we need HMRC to recover the holiday pay on their behalf.”

Andy Chamberlain, director of policy at IPSE, the Association of Independent Professionals and the Self-Employed, said: "We fully support the efforts made by Rebecca Seeley-Harris and James Poyser to draw attention to this issue. In the absence of an Employment Bill in the Queen's Speech; we would urge the government to look closely at the recommendations in their paper.

"The time for much tighter regulation of umbrella companies is long overdue. The recent controversy over mini-umbrellas is the tip of the iceberg. While some umbrellas companies are entirely compliant, many others are not," he said.

The Department for Business, Energy & Industrial Strategy, which oversee UK employment law, has been contacted for comment and promised to provide a statement on Friday.

An HMRC spokesperson said its Our Fraud Investigation Service was using its civil and criminal powers to challenge those who are involved and facilitating the mini-umbrella company fraud "including recently deregistering more than 22,000 [Mini Umbrella Companies] MUCs who we believe are exploiting the VAT Flat Rate Scheme and removing their access to the Employment Allowance.

"We have also made a number of arrests in relation to MUC fraud and also taken steps to recover input tax in cases where it has established that a business in the supply chain knew, or should have known, that there was fraud," the spokesperson said. ®

Updated to add at 1127 on 17 May 2021:

A government spokesperson told The Register: "We remain committed to introducing legislation to expand state enforcement for agency workers to cover umbrella companies and extending the remit of the regulator to investigate any relevant complaints relating to umbrella companies. We will bring forward an Employment Bill when Parliamentary time allows."