The Association of Recruitment Consultancies (ARC) initial analysis is as follows.
The key proposals are relatively wide ranging and build on principles of transparency. The starting point is to define what is an umbrella company and here the government suggests two alternative approaches both of which are likely to capture the type of business referred to. At the same time however it suggests an alternative approach which it is acknowledged may leave a business in one scenario falling within the definition, and in another scenario falling outside. Clarity will be needed around the eventual definition to ensure that a business is correctly identified as an umbrella.
There appears to be a clear distinction between a business that provides work finding services and one that does not. Given that many umbrella companies offer work finding services in order to meet the overarching employment test required to establish entitlement to tax reliefs on travel and subsistence payments, this aspect will need careful consideration.
Employment businesses are to be restricted to engaging workers to be supplied in four different ways – these, largely as now, being direct employment, direct contract for services, umbrella company and PSC. Conflict between definitions of umbrella and PSC will need resolving.
The proposed rule is then to be that only one person or business would be allowed in the supply chain between the employment business and the worker. This is designed to stop engagement of multiple businesses such as mini umbrellas.
Regulations are under consideration to mirror the current agency regulations, the Conduct of Employment Agencies and employment Businesses Regulations 2003, in several areas:
- the umbrella must pay the worker regardless of receipt of payment from the employment business, which mirrors the obligation on an EB to pay a worker regardless of receipt of payment from the hirer;
- umbrella contracts must not be conditional on the worker paying for additional services ‘beyond their margin’, ‘margin’ being described as the fee or commission for the service provided as an umbrella company; this could be open to interpretation
- umbrella companies must provide accurate information to enable employment businesses to issue a Key Information Document; this is essential to avoid dispute at a later stage
- umbrellas must inform an employment business if it is aware of information indicating that a worker is unsuitable for a role. This idea is based on the fact that umbrella companies as employers may be aware of information about a candidate that the employment business is not.
In addition the consultation considers whether job adverts may be required to identify actual gross pay rates taking into account overheads such as employer NICs which may be deducted from monies received by the umbrella.
The proposal is that those of the above rules that are adopted in new regulations should be enforced by the Employment Agencies Inspectorate (EAS).
In terms of tax enforcement this appears to rely on the concept of transferring liability to others who work with umbrella companies, and brings employment businesses and hirers into the frame. The ideas are
- there should be a statutory obligation to perform mandatory due diligence with the intention that supply chains are secured against tax non compliance in all its forms including error; it’s not clear how you can secure against error, but the principle is clear
- there should be a penalty regime where due diligence was not undertaken
- transfer of tax debt owed by an umbrella company to another party in the supply chain; this mirrors the approach taken by HMRC in the Managed Service Company legislation and under the latest IR35 rules, and will be of great concern to employment businesses and hirers given the lack of control over the activities of an umbrella company
- making the employment business the deemed employer of the worker for tax purposes; this effectively would make the employment business responsible for making payments to the worker and follows the concept of ‘deemed employment for tax purposes’ contained in the latest IR35 rules; on the face of it this would appear to rule out any advantage of working with an umbrella company.
In addition to the above the government proposes to introduce rules on umbrella companies that take advantage of flat rate VAT schemes, startup employment allowances, and mini umbrella models. These are the typical devices used by some businesses that HMRC has long been concerned about as being involved in tax avoidance. HMRC will have additional powers around these specific areas.
Conclusion
Adrian Marlowe, chairman of ARC commented: “As with IR35 tax, the tool that the government is relying upon to stop non compliance is to impose liability on those who work with umbrella companies, namely the employment businesses and hirers. This will surprise many.
On the face of it the proposals for penalties for not complying with due diligence rules, deemed responsibility for pay, and of course transfer of tax and NICs debt if implemented will likely as a minimum change the demographic and push up cost for both those who choose to continue working with umbrella companies and those who stop doing so. Hopefully the right balance can be struck and at the end of the day there will be room for businesses that provide a genuinely compliant service to the many workers who want to be employed by an umbrella.”
The consultation is set to close on 29th August 2023.
ARC’s role is to support its members and the industry over issues that are important to the recruitment industry. Given the potential impact, this is just such a matter. Please send your comments to info@arc-org.net.
