The government has announced a raft of proposals being considered to tackle tax avoidance in umbrella companies. This follows their November 2021 consultation on the role of umbrella companies in the labour market, amid concerns about unlawful working practices.
In its response, published on 6th June 2023, the government proposed:
- New ways to define umbrella companies;
- Mandating proper due diligence regarding umbrella company compliance;
- Proposed implementing the transfer of debt up the supply chain;
- Regulating umbrella companies for employment rights;
- Recruitment agencies to be the “deemed employer” meaning they would be responsible for ensuring PAYE is processed properly, even if processed by another business;
- Dealing with mini umbrella companies by requiring a UK resident director in order to claim the employment allowance.
This is a mixed bag. There are some valid proposals, like ensuring proper due diligence is carried out on umbrella companies and holding the supply chain accountable if they fail to do so. But at the same time, the government is putting forward ideas which need real work and threaten how the wider recruitment sector operates, such as the deemed employer proposal.
HMRC themselves admit that the majority of disguised remuneration tax avoidance schemes operate within the contracting sector. These masquerade as compliant umbrellas, posing a huge personal financial risk to over 500,000 people working in this way – some of whom have no choice about their umbrella. Not only are innocent workers affected, but the Treasury also misses out on billions in tax due to these immoral schemes.
It’s taken a year and a half for the government to publish this response, which doesn’t actually resolve any immediate concerns. The reality is, the longer that the government sits on its hands, the more problems it creates.