At the end of last year, MPs on the Loan Charge All Party Parliamentary Group (APPG) ran an inquiry into “How Contracting Should Work” and the report has been published today (08/04/21). The purpose of the inquiry was to consider the wider context leading to the use of disguised remuneration, so the report examines how professional contract and freelance working should operate; be remunerated and taxed appropriately; and also how to prevent tax avoidance schemes being promoted or actually existing at all.
The report exposes significant non-compliance and malpractice in the supply chain by many umbrella companies and recruitment agencies. Some of this has driven the operation and mis-selling of tax avoidance schemes which has caused the supply chain to be dubbed a ‘Wild West’ by many professionals. The report is here.
Recommendations to improve supply chain compliance
There are many interesting recommendations for the supply chain:
- Strengthen, clarify and enforce the existing regulation that makes it unlawful for an employment business to offer a position that is conditional on using a specified umbrella company or intermediary;
- Make it unlawful for agencies to get financial incentives or ‘kickbacks’ from umbrella companies, via timesheet commissions, introductions, or otherwise;
- Make it unlawful for a contractor to be forced or coerced to opt-out of the Conduct of Employment Regulations (unless they are working on an “outside IR35” basis via a limited company);
- Make it a statutory obligation to quote only PAYE contract rates for temporary worker engagements that are not “outside IR35”;
- Outlaw the withholding of holiday pay and introduce the recommendation from the Taylor Review, so that contractors receive, by default, their holiday pay “rolled up”;
- Introduce mandatory transparency, so that all payroll intermediaries and agencies must disclose all fees and costs and explain all deductions, and ensure recruitment agencies provide KIDs to all workers.
A fundamental conclusion of the ‘How Contracting Should Work’ Inquiry is that the unregulated umbrella market is out-of-control, all too often exploiting contractors (often without them realising it) and is also a key reason for tax avoidance schemes operating and being so readily and openly advertised.
According to the report, it is clear that the current system of voluntary regulation and accreditation does not stop the facilitation of tax avoidance schemes and does not stop malpractice in the supply chain (by both umbrella companies/payroll intermediaries and also recruitment agencies). Therefore, the Government should announce plans to intervene and introduce statutory regulation for payroll intermediaries.
We have seen numerous similar conclusions from other respectable and independent bodies over the years, and indeed the government has already committed to regulating the sector, as recommended in Matthew Taylor’s Good Work Plan back in July 2017. However there has been no real progress, and their original plan would not have been fit for purpose anyway as it was simply going to entail applying the agency conduct regulations to the umbrella sector, which crucially omit to include any tax or NIC requirements. Although not fit for purpose, such regulation would at least have been a start in the right direction if it had been implemented prior to the off-payroll changes. However, given that deadline has been missed, what is actually required is going back to the drawing board, and designing properly targeted regulation that will outlaw non-compliance.