The ethical challenge of umbrella companies

Unregulated umbrella companies are costing contractors and the Exchequer billions, and it has to stop, argues employment expert Rebecca Seeley Harris.

Umbrella companies employ a temporary worker (an agency worker or contractor) on behalf of an employment agency, which provides the services of the worker to their clients.

They were initially brought to market because of the introduction of the so-called IR35 off-payroll working rules.

They have grown steadily in use, especially with the introduction of the Managed Service Company legislation in 2007 and, more recently, the off-payroll reforms in the public sector brought in during 2017. Around 600,000 people now work for umbrella companies.

However, since April 2021, the use of umbrellas has grown considerably as companies manage their risk in direct response to the introduction of off-payroll reforms to the private sector.

The pandemic has brought problems with umbrellas into much sharper focus. For instance, there are holiday pay scandals (estimated to cost in excess of £1.8bn) and the propagation of mini-umbrellas to evade tax. These are some of the extremely concerning consequences of having a largely unregulated market.

While I acknowledge there are some extremely well run and ethical umbrellas, delving deeper into the practices being used, there are signs of industrial-scale non-compliance and abuse.

The abuse of worker’s rights and tax evasion has reached completely unacceptable proportions. Through no fault of their own, thousands of hard-working people have become victims of a market that frequently acts unethically and government policy that is not fit for purpose.

Here are some of the ways they can suffer. Non-compliant umbrellas may illegally deduct employer’s NI from workers. Alternatively, they may lure them with an attractive ‘headline’ rate of pay (the assignment rate charged to the agency) from which multiple deductions will be taken.  Among mini umbrella companies (MUCs), a fraudulent practice is to operate a string of limited companies that employ a small number of workers in order to gain employer assistance designed for start-ups.

Holiday pay, as previously mentioned, is a significant area of concern. Unethical umbrella companies will pocket accrued holiday pay if the contractor does not claim it during the leave year. Often the contractor will not know of their entitlement.

The tax evasion from unethical mini-umbrella practices and the like is estimated to amount to around £4.5bn in lost revenue to HMRC.  This makes the £1bn gap that April’s off-payroll reforms are meant to close look like a drop in the ocean. 

I’m not the first to recognise this. There have been many calls for the regulation of the umbrella industry. Recently, the Loan Charge All Party Parliamentary Group (APPG) published its report into “How Contracting Should Work”, which exposed significant non-compliance and malpractice in the supply chain by umbrella companies and recruitment agencies.

In addition, the House of Lords Economic Affairs Finance Bill Sub-Committee, has publicly questioned why the Government pressed ahead with the off-payroll working rules instead of concentrating on the recommendations of the Taylor Review, concluding “The lack of strategic coordination on this issue across government and between departments is highly regrettable.”

While I acknowledge that the Government has made some inroads into the regulation of umbrella companies, it has fallen short of introducing effective regulation.

Earlier this month, the Department for Business, Energy & Industrial Strategy (BEIS) announced its intention to create a Single Enforcement Body (SEB) to stamp out these abuses. This is a welcome step. But it will require both enabling legislation and funding and is some way off. Alone, it will not amount to effective regulation of this troublesome sector.

That’s why, with the help of a number of leading authorities on umbrellas, I have gone as far as to draft a policy to assist the Government in putting in place regulation that protects workers’ rights, recovers tax, and enforces compliance. I have also called for urgent action to fill the vacant post of Director of Labour Market Enforcement, which provides strategic oversight of this sector.

Working with James Poyser, CEO of inniAccounts and founder of offpayroll.org.uk, my intention is to be constructive and bring together a range of stakeholders – including AAT – that not only ensure deplorable practices are stamped out and tax revenue is recovered, but that the elements of enforceable employment policy are designed in such a way that they reflect societies new ways of working. It may be a tough ask but reform is essential.

About the author

Rebecca Seeley Harris is an employment status expert who has worked as a senior policy advisor to the Government. She is also  Chair of the Employment Status Forum –  a nascent think tank on employment issues.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.