Well, it seems there are plenty if recent HM Treasury publications are anything to go by!
The Consultations
On 30 November 2021, HM Treasury initiated a call for evidence regarding the umbrella company market. The catalyst for this action was growing concerns about tax non-compliance and the risks posed to employment rights within this sector. Notably, over 400 responses were received from various stakeholders.
Subsequently, HMRC has reviewed these responses and updated its guidance on working through umbrella companies.
The Department for Business and Trade has also released dedicated guidance on Key Information Documents (KIDs) for agency workers employed through umbrella companies. Moreover, the UK government is actively exploring ways to support workers through enhanced guidance and online tools.
In a significant development, on 6 June 2023, HM Treasury, HMRC, and the Department for Business and Trade unveiled the summary of responses to the call for evidence and initiated a fresh consultation. This new consultation, which focuses on proposals to regulate umbrella companies, remained open for input until 29 August 2023.
What is an Umbrella Company?
Unsurprisingly, this was not the type of umbrella that Messrs Flanagan and Allen were singing about!
Broadly, they exist because organisations, referred to as “End Users,” seek to utilise the services of workers without formally employing them.
In essence, they want both their cake and be able to eat it.
Umbrella companies play the role of employer for these workers, relieving the End User of this obligation. They collect fees from the End User, deduct income tax and National Insurance Contributions (NICs), and remit the net amount to the worker.
However, there is scope for skulduggery here:
- Labour Supply Fraud: In some cases, unscrupulous umbrella companies might unlawfully deduct tax and NICs (PAYE) and abscond before HMRC detects any wrongdoing;
- Tax Schemes: Instead of subjecting to PAYE all of the payments made to workers, some umbrella companies bolt on tax schemes that argue part of the worker’s payment is not taxable (e.g. a loan, advance or magic beans). This approach, it is averred, increases the worker’s take-home pay while boosting fees for the promoter.
It’s worth noting that currently, there is no statutory definition of an umbrella company, which is one of the topics addressed in the most recent consultations. However, this is not something I want to discuss today.
Tackling Tax Non-Compliance
The consultation outlines three primary options for addressing ongoing tax non-compliance:
Option 1: Mandating due diligence either by the end client or the employment business. This broad requirement encompasses all forms of tax non-compliance, including errors, avoidance, and fraud.
Option 2: Transferring the tax debt of umbrella companies to others in the labor supply chain. This would involve legislative changes granting HMRC the authority to collect an umbrella company’s tax debt from another business, akin to cases of non-compliance with the off-payroll working rules. Interestingly, I suggested a similar solution in a letter to Rishi Sunak in 2020 (albeit it is acknowledge he had his hands full back then!)
Option 3: Designating another organisation as the employer for tax purposes, relieving the umbrella company of tax calculation and PAYE responsibilities. However, this option may face resistance as it removes a key benefit of hiring through an umbrella company.
A solution borrowed from the sleepy world of pension administration?
Both pension administration and payroll management involve the delegation of aspects of UK tax-related responsibilities to third parties
Several years ago, it was relatively easy to register a pension scheme online with minimal scrutiny.
This led to pension liberation schemes and questionable investment product choices being pressed on members.
In response, the government strengthened the registration process, introduced a “fit and proper” test, which demanded that prospective and current administrators must have:
- A demonstratable knowledge of pensions and pensions tax legislation.
- Have no history of pension liberation involvement.
- No association with de-registered pension schemes or tax fraud.
- No criminal convictions related to finance, corporate bodies, or dishonesty.
- No adverse civil proceedings related to finance, corporate bodies, or dishonesty/misconduct.
- No involvement in designing, facilitating, or marketing tax avoidance schemes.
- No employment of advisors linked to pension liberation or tax avoidance.
- No disqualification from acting as a company director or bankruptcy.
This not only made it much more difficult for administrators to set up new nefarious pension vehicles but, through the threat of a de-registration charge which, at 40% and above x value of assets, represents a significant penalty for administrators, trustees, and even members (in certain cases).
Could we look at a similar approach for employers?
Drawing inspiration from pension scheme reforms, a similar process could be introduced for employers, albeit with distinctions for regular employers registered for PAYE and payroll companies or umbrella companies.
The latter could face more stringent requirements, particularly regarding the “fit and proper person” criteria.
For umbrella company employers, it could be that a “fit and proper person” must have:
- demonstratable knowledge of employment law and employment tax legislation.
- no involvement in disguised remuneration schemes.
- no history of employing or associating with de-registered umbrella companies.
- no involvement in tax fraud, misuse of tax repayment systems, or fraudulent behavior.
- no criminal convictions related to finance, corporate bodies, or dishonesty.
- no history of adverse civil proceedings related to finance, tax, corporate bodies, or dishonesty/misconduct.
- no association with designing, facilitating, or marketing tax avoidance schemes.
- no employment of advisors who have marketed, designed, or facilitated tax avoidance schemes.
Although perhaps seemingly innocuous, the first factor is important as it could help identify and weed out individuals who serve as mere figureheads (“straw men” or “stooge directors”) without genuine expertise in the field.
In other words, they generally will not be able to show, objectively, their knowledge in this area and should be be unable to convince HMRC that they possess the knowledge and experience.
Additionally, assuming HMRC can withhold registration if they are not happy with their inquiries, then it is difficult to see how an overseas director of a mini-umbrella would ever persuade HMRC they had the working knowledge to satisfy this requirement.
Of course, these factors could be applied at any time. As such, as HMRC obtains information about umbrella schemes (they now pick up issues quickly from RTI or from speaking to workers) it could act quickly to de-register the employer. This would be more effective than the current process of closing down a scheme which, although it has been accelerated over last few years, still takes some time.
The de-registration charge should be set at punchy level – reflecting the amount of PAYE which should have, but has not, been paid over.
This should be paid by the umbrella company. Where it cannot be paid out of the assets of the umbrella company then there could be a power to transfer this to the directors or the ultimate beneficial owners of the umbrella company.
But what if the tax cannot be recovered from those involved with the scheme (you can’t get blood out of a stone).
The pension rules, above, allow for the member of the scheme to be the payer of last resort in certain circumstances.
Should we take the same approach for umbrellas?
I take the view that, after fees, most basic rate taxpayers will obtain little benefit from using an umbrella scheme with a tax structure bolted on to the back.
As such, there should be no ability to recover income tax and NICs broadly chargeable at the basic rates.
Other taxpayers, who have escaped tax and NICs at the higher rates should have to make up the shortfall on that part of their earnings. In other words, they are taxed by reference on a rudimentary assessment of their benefit.
Clearly, this will result in some of the tax not being recoverable by HMRC / Government. This will reflect HMRC’s / Government’s contribution to where we find ourselves now. However, at any time, HMRC will be able to remove the ‘keys to the kingdom’ from unsavoury umbrellas by determining they are not fit and proper. Any new players should be blocked from entering into the market.
Conclusion
In conclusion, while there are more complex strategies, such as enhancing HMRC’s technological capabilities to improve monitoring, the “fit and proper person” test offers a viable, cost-effective alternative.
It requires minimal burden on HMRC and provides a well-targeted solution, particularly through the de-registration charge.
This charge can be directed at promoters and transferred to key stakeholders, ensuring that only higher-rate taxpayers who have obtained a material benefit ever face a potential recovery of tax.
We are told that “When there’s a lull, and things are dull” the umbrella man “sharpens knives for all the wives”
It seems the knives are being sharpened for UCs!
If you have any queries around this article on umbrella companies, or other tax matters, then please do get in touch.