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Legislation to “Curb or Kill” Umbrella Sector

Following a series of bad publicity and scandals, senior MPs have taken action seeking to “curb or kill” umbrella companies.  Amendments to the Finance Bill have been tabled by David Davis MP and Sir Iain Duncan-Smith MP which will be debated a voted on by parliament on Monday 24 May 2021.  If approved, the draft legislation will effectively give the government a year to decide how to regulate the umbrella sector, or if the current hiatus continues then umbrellas will need to change how they operate to become an outsourced payment bureau by 6 April 2022.

Why it’s needed

The plans are drastic, particularly as whole industry could be decimated as a result, but the levels of frustration with dubious umbrella companies has risen to a crescendo in the light of recent scandals.  There have been several high-profile exposés in recent months including:

  • contractors not receiving their statutory holiday (despite their client providing this to the umbrella);
  • mini-umbrella arrangements contriving to receive the Employment Allowance on an industrial scale;
  • contractors forced into tax avoidance schemes;
  • and reported losses of £4.5bn from the Treasury annually due to malpractice in the sector.

None of this is new, but despite many experts and leaders calling for the umbrella sector to be regulating the government continues to do nothing – so it’s hardly surprising that drastic action is now being planned.

Error in the original Finance Bill

The technical detail of amendments has arisen from errors in the original drafting of the Finance Bill which, in the context of off-payroll legislation, would have resulted in umbrella firms being unable to be the feepayer, making their role redundant.  The latest amendments proposed by David Davis MP do not fully correct the original error, and instead allow a grace period of 12 months (for the government to regulate), after which the original error will stand and umbrellas in their current iteration will be extinguished.

Impact of off-payroll legislation

This year’s off-payroll changes have resulted in increased demand for umbrellas because they employ contractors and therefore they provide a solution for “inside IR35” roles.  Inevitably the off-payroll changes have also increased the prevalence of dubious umbrellas, plus increased awareness of poor practices such as eye-watering financial incentives paid to recruitment firms in exchange for recommending particular umbrella firms.  Of course, it is the non-compliant providers that can afford the largest bribes- by virtue of being non-compliant which is a cheaper way to run a business.

For far too long umbrellas have been in the “too difficult” pot with the government failing to properly understand the sector, failing to plan effective policies, and failing to take action.  Umbrella regulation is long overdue now, and there is no excuse for the current hiatus.  We urgently need a strategic approach which cuts across all relevant government departments and puts workers’ best interests at the heart of any regulation.

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