Tax campaigners urge government to take action to protect umbrella company workers
The Low Incomes Tax Reform Group (LITRG) is adding its voice to growing calls for regulation of umbrella companies, starting with implementing previous proposals. So far proposed legislation has not been implemented, the Single Enforcement Body has not materialised and there is no current Director of Labour Market Enforcement. As a result, low-income workers continue to be at risk of working through non-compliant umbrella companies, warns LITRG.
Umbrella companies are businesses that take on agency workers and contractors as their own employees and as such, are required to deal with pay, tax and other employer obligations. They are used increasingly by low-income workers in the labour market, are often poorly understood and some, non-compliant, umbrella companies do not deal with their pay, tax and other employer obligations correctly. As well as supporting the broad call for regulation, LITRG is also sharing advice for workers on how to avoid common problems with using them (see below).
This call to action is after the publication of ‘Umbrella Companies – Call for Regulation’, a set of proposals for government action in this area, authored by employment status expert Rebecca Seeley Harris. The paper draws heavily on LITRG’s recent research report, ‘Labour Market Intermediaries’1 and urges a consultative approach to the design of regulation, to be pursued as a priority by government.
In the absence of any real progress from government in this area, calls for the regulation of umbrella companies are getting more urgent, with LITRG joining the voices of Matthew Taylor (author of the 2017 Taylor review of modern working practices), the Trade Union Congress (TUC) and the Association of Independent Professionals and the Self-Employed (IPSE), among others.2
Victoria Todd, Head of LITRG, said:
“Umbrella companies have been in the news a lot recently: there was the furore about an umbrella withholding holiday pay from workers,3 the loan charge APPG’s4 report linking umbrella companies to disguised remuneration and now concerns about the use of mini umbrella companies.5 Added to the negative practices by non-compliant umbrella companies highlighted in our own recent report, it is clear what the problems are in this area and that some action is needed.
“The Government previously set out a number of proposals which would, if implemented, be the first steps towards regulation of the sector.6 It is disappointing that none of these proposals have been taken forward. Government must make these actions a priority as well as giving serious consideration to what other steps might be needed.
“Umbrella companies are not always bad. They often perform useful and legitimate functions such as taking on the payroll and HR function of temporary work agencies who can’t or won’t do this in-house and providing an alternative route for freelance contractors who would otherwise have to work through a limited company. Many umbrella companies also adhere to certain standards and are concerned about the welfare of their workers. However, there is a sizeable minority of umbrella companies whose bad practice and non-compliance sadly tarnishes the rest of the industry.
“Regulation would drive away those umbrella companies that do not respect employment law, which will help protect lower paid agency workers who are vulnerable to exploitation. As they are likely to be the umbrella companies that are also non-compliant with tax law, there is a potential double benefit. There are also wider impacts. For example, non-payment of holiday pay is likely to be impacting considerably on gross wage levels, meaning lower receipts for the Exchequer.
“It was in 2017 that Matthew Taylor first mooted the idea of regulation but nearly four years later, there has been no progress, even though the Government accepted his recommendation. Indeed, it seems further away than ever, given the post of the Director of Labour Market Enforcement, who provides strategic direction for the enforcement bodies, is currently empty.
“The case for some regulation is now overwhelming and we urge the Government to move the issue out of the ‘too hard’ basket, implement previous proposals and consider what other steps are needed to address the many issues in the sector.”
Umbrella companies: tips from LITRG
LITRG is concerned about the lack of understanding about how umbrella companies work by the workers who use them and today it is offering people the following tips on how to find a safe, compliant umbrella company:7
- There is no single definition of an umbrella company. Anyone can set up a company and label itself an umbrella company. Some umbrella companies are not compliant with employment and tax law and the sector is currently unregulated. It is vital that you are on guard.
- In particular, be aware that some agencies are incentivised by a commission into encouraging you to join up to certain umbrella companies. Do not go with an umbrella company just because it is on your agencies’ Preferred Supplier List, or just because it has certain accreditations – you still need to do your research thoroughly.
- Be clear on what rate your agency is quoting you to work through an umbrella – is it the PAYE rate (the rate they would pay you if you worked through them) or is it the ‘uplifted rate’ (that is, the PAYE rate plus all the ‘on top’ employment costs the umbrella company will now have). It should be the latter (uplifted rate).
- Make sure your umbrella company is not a disguised remuneration scheme. A disguised remuneration scheme is where you are paid a minimum wage element and a non-taxable element (like a loan, grant, advance etc.). Some possible warning signs of disguised remuneration schemes for you to be wary about are: not receiving a payslip or receiving a payslip that shows a different ‘net’ amount to what you received; receiving more than one payment into your bank account each pay period; and information in your HMRC Personal Tax Account about your pay and taxes that does not match what you are being paid.
- Make sure you do not get caught up with problematic ‘mini’ umbrella companies. The key giveaway is that your payslip will have different PAYE references – as much as every week – with obvious impacts to the Exchequer but also to you – as you will never be with any one employer long enough to accrue any rights, and you will have an unusual and fragmented employment record, which could impact on you in many ways.
- Check how the umbrella company will deal with your holiday pay – if it is not on a ‘rolled up’ basis ask them to confirm the circumstances in which you may lose the holiday pay (for example, if you do not request it before the end of the holiday year). If you leave the umbrella company, ask them to confirm that all outstanding holiday pay will be paid to you with your final payment.
- Do not get swayed by all the different ‘perks’ that may be advertised. Some of these may be worth very little, e.g., same day bank transfers (which are pretty standard these days), or may not be relevant to you (e.g., tailored mortgage deals). Some may carry an extra cost over and above the standard ‘margin’.
Notes for editors
2. Hidden cost of umbrella companies in UK ‘may top £4.5bn a year’ – The Guardian
3. BBC Money Box programme: https://www.bbc.co.uk/programmes/m000tcl7
5. https://www.gov.uk/guidance/mini-umbrella-company-fraud
6. The original proposal was in the Agency worker recommendations consultation from back in 2018: Through legislation we could require umbrella companies and intermediaries to meet a set of minimum standards in line with the minimum requirements currently in place for employment businesses. This would also provide the work seeker with an avenue to make a complaint if an issue could not be resolved directly with the umbrella company or intermediary, without having to go to an Employment Tribunal.
It was then all rolled into the Single Enforcement Body (SEB) consultation in which it was stated: …We believe the next logical step to ensure the state can effectively protect vulnerable workers both now and in the future, is to explore the case for creating a new single labour market enforcement body to deliver: • extended state enforcement, delivering our commitments to enforce holiday pay for vulnerable workers and regulate umbrella companies…
The SEB was due to be set up in the Employment Bill announced at Queens Speech in 2019: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/853886/Queen_s_Speech_December_2019_-_background_briefing_notes.pdf. It still has not materialised.
7. The tips come from a factsheet produced by Low Incomes Tax Reform Group (LITRG) – click here.
8. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact Hamant Verma, External Relations Officer, 0207 340 2702 [email protected]