UK government makes announcement on tackling non-compliance in the 'umbrella' companies market

The UK government has announced as one of its annual Tax Administration and Maintenance Day actions that it will publish its response to the "umbrella" consultation "in due course". Umbrella companies, staffing suppliers, end users and contractors will now have to wait to find out what, if anything, the government will do to regulate the umbrella market.

The announcement provides little detail about the likely outcome of the consultation other than to confirm that the government will publish guidance later this year to support workers and businesses that use umbrella companies, including an online pay-checking tool to help umbrella works to check whether the correct deductions are being made from their pay.

The announcement also hints that it is preferred option is to introduce a statutory due diligence regime for businesses that use umbrella companies but that it needs to work further with the recruitment industry to understand the impacts of this approach and whether it would reduce umbrella non-compliance. 

'Kicked down the road'?

It is not surprising that the government has, once again,  kicked this issue down the road.  The "Call for Evidence: Umbrella Company Market", published in November 2021 was followed by a consultation dated June 2023 – industry stakeholders have provided extensive responses to a wide range of questions at both stages. 

A response to this consultation was expected to be announced today but it appears that the government needs more time to understand how the industry works and how to or, even whether to, regulate the umbrella industry. Given the imminent general election, we think it is very unlikely that we will see a detailed response or draft legislation this year.

Online pay checker

It is difficult to see how the government could develop such as tool to provide anything other than an indicative rate of pay. Umbrella companies operate a range of different commercial models but only some work on the basis of agreeing a pay rate to the umbrella worker at a set hourly rate. Many umbrellas still operate what is known as a "top down" calculation which involves working out a worker's taxable income after the umbrella's margin and statutory costs have been deducted from the sum they charge the staffing company.

Umbrella workers in some cases do not know the rate the staffing company pays the umbrella company and so it is difficult to see how a pay checker could be used without a worker having to make assumptions about what the "top" number is. Use of a generic pay checker could lead to a large number of complaints for umbrella companies (and staffing companies), even where there are operating compliantly.

Intention to introduce statutory due diligence

The 2023 consultation proposed a number of options to deal with perceived umbrella company non-compliance for employment rights purposes and to tackle tax non-compliance. Today's announcement hints that the government's preferred option involves introducing statutory due diligence but it is not clear whether that will be for both employment rights and tax compliance purposes.

Either way, there will still be a need to introduce a statutory definition of umbrella company and to clearly define what type of occurrence would trigger liability to comply with any new legislation involving the umbrella market.

The 2023 consultation proposed a due diligence-based option in relation to tackling tax non-compliance but there was no obvious equivalent due diligence approach proposed as part of the employment rights measures. 

The due diligence option (option one) proposed was to mandate due diligence, requiring organisations contracting with umbrella companies to carry out a minimum level of due diligence on the umbrella company and suggested that the requirement could be supported by a penalty regime. It is difficult to see how this approach could reduce non-compliance unless compliance is actively "policed" by a strong regulator which has the effect of driving behavioural compliance along the supply chain.

It remains to be seen whether the government will introduce a regime alongside any requirement to carry out statutory due diligence checks that will transfer liability where failure to carry out checks results in tax non-compliance or for failure to deliver employment rights.

Ultimately, a "due diligence" regime may only work if accompanied by tax debt and employment liabilities passing up the chain to any organisation that fails to do the due diligence "properly" (whatever that will be deemed to mean).

Today's announcement does, however, seem to indicate that option three of deeming the employment business as the employer for tax purposes is unlikely to be adopted.

What should staffing companies and end users do now?

Prepare to get involved in further consultation when the response to the consultation and definitions of umbrella company are published.

End users and staffing companies should identify which workers in their staffing supply chains are engaged via umbrellas and start to anticipate the need to carry out due diligence on their labour supply chains to ensure, as far as reasonably possible, that their staffing suppliers deal only with compliant umbrella companies. This will involve including the requirement, possibly as part of any RFP or tender process and in contracts,  to demonstrate that checks have been carried out and repeated at regular intervals and that the use of umbrella companies in the supply chain poses low/no risk to end users. 

Osborne Clarke comment

Don't forget there are things you should already be doing relating to use of umbrella arrangements: there are already various measures making it increasingly risky for staffing companies and end users to use "dodgy" umbrellas, including the Criminal Finances Act 2017 – making staffing companies and end users liable if they have not taken reasonable steps to prevent tax evasion in their staffing supply chain – and other measures attacking the marketing or promotion of tax avoidance schemes, including certain umbrella arrangements.