IR35 reforms: MPs call on government to clean up UK’s ‘wild west’ contracting labour supply chain

An MP-led inquiry into the UK’s “wild west”-like contracting sector is demanding urgent action by the government to push through regulation to ensure freelance IT workers receive the correct pay and benefits for the work they do through umbrella companies.

Evidence shared with the How Contracting Should Work inquiry, headed up by the cross-party Loan Charge All-Party Parliamentary Group (APPG), has prompted calls for the government to move “as quickly as possible” to eradicate the bad actors and malpractice that is allegedly rife throughout the contracting labour supply chain.

These bad actors include non-compliant umbrella companies that make unlawful tax deductions and withhold holiday pay from the contractors on their payroll, and firms that act as fronts for disguised remuneration schemes.

The 97-page report documenting the inquiry’s findings also features allegations about employment agencies demanding “kickback payments” from umbrella companies in exchange for recommending their services to the contractors they source work for.

These “pay-for-play”-like arrangements may involve an umbrella company paying tens of thousands of pounds to be included on the list of payroll providers the agency tells contractors they must work through, the inquiry report stated.

The agency may charge the umbrella company a fee for introducing a contractor to them or seek reimbursement through timesheet rebates, the inquiry heard in a submission from Phil Pluck, CEO of the Freelancer and Contractor Services Association (FCSA).

The FCSA offers accreditation to compliant umbrella companies that abide by its “codes of compliance”. It has 65 members that employ 170,000 contractors.

As acknowledged in Pluck’s written evidence to the inquiry, the majority of umbrella companies are not FCSA-accredited, with its estimates suggesting there could be up to 900 of them operating within the labour supply chain, and “kickback” arrangements are commonplace.

“A fee of £30,000 is not uncommon… [or the] agency receives a payment for every timesheet processed (typically £10) in addition to whatever margins they make elsewhere,” the report stated.

In other instances, agencies have demanded payment in other ways. “Some recruitment agency directors have insisted on less visible incentives from umbrella companies as a condition of being an agency supplier,” said the report. “These have even included fitted kitchens, paid-for luxury holidays and pre-paid credit cards for recruitment agency owners or directors.”

FCSA members that resist requests from these agencies to participate in similar arrangements have lost business as a result, the association confirmed.

“FCSA does not in any way approve of this practice, but it is a common element within the supply chain and… driven by the supply chain, with umbrella companies always at the bottom of that chain and so are often given a ‘take it or leave it’ option,” said the association in its written evidence.

It is further claimed in the report that umbrella companies that can “afford these types of requests tend to be less compliant organisations which do not necessarily pay all the contractor/employee costs they should”.

Umbrella companies are “high-volume, low-margin” businesses, said Pluck in his written submission to the inquiry, and bad actors in the sector indulge in dubious practices like this to keep operating costs down and drive up their profits.

“Non-compliant umbrellas save costs by failing to take on employment costs – holiday pay, taxes, National Insurance, pension contributions, apprenticeship levy,” he said in his submission. “This gives them a huge profit margin which allows them to fuel the incentive [kickback] schemes within the industry.”

He added: “Because FCSA members carry large legitimate costs, they are the ones that can ill-afford to take part in these schemes and [have] lost business as a result.”

The onset of the IR35 reforms in the public and private sectors has led to a surge in end clients demanding contractors provide their services via Pay As You Earn (PAYE) umbrella companies.

The reforms usher in changes that mean responsibility for determining if limited company contractors should be taxed in the same way as salaried employees (inside IR35) or off-payroll employees now falls on the end clients they work for.

“Non-compliant umbrellas save costs by failing to take on employment costs. This gives them a huge profit margin which allows them to fuel the incentive schemes within the industry”

When the contractor works via an umbrella company and moves onto their payroll, the end client is no longer responsible for determining how the contractor should be taxed.

Contracting stakeholders predict the number of contractors working through umbrella companies will soar this year in response to the IR35 reforms being rolled out to the private sector, which has already led to renewed calls for umbrella companies to be regulated.

Presently, they are not subject to any form of statutory regulation, although the UK government has publicly committed to addressing this at several points in recent years.

In light of the “unacceptable practices” the inquiry uncovered, the Loan Charge APPG said the government must urgently introduce statutory regulation for umbrella companies.

“The government should proceed as quickly as possible to clean up the supply chain, the ‘wild west’, which is clearly where many of the problems associated with [disguised remuneration] schemes have occurred,” the report stated.

It then went on to make a series of recommendations about the kinds of regulations that should be introduced to protect contractors and compliant umbrella companies alike.

These recommendations include making it “unlawful” for agencies to force contractors to pick from a restricted list of umbrella companies to work through, and for agencies to receive financial kickbacks from umbrella companies too.

It also calls for the withholding of holiday pay from contractors to be made unlawful, and for measures to be introduced that make it mandatory for umbrellas and agencies to disclose all fees, costs and deductions that contractors’ pay packets will be subject to.

It is also urging contractors to write to their MPs to report experiences of “rogue practices” they have come across during engagements with agencies and umbrellas.

“We call on all freelance and contract workers and advisers who have experience of and evidence showing rogue practices to report it to their own MP to present such evidence to the government and to appropriate parliamentary committees, as well as reporting it to the representative bodies, if it involves any of their members,” the report stated.