IR35 reforms: Government gifted roadmap to umbrella regulation by ex-senior policy adviser

Digging into the policy draft  

The draft policy document puts forward a series of proposals it claims would expedite the decision-making and legislative steps needed to start regulating umbrella companies, which is a process that contracting stakeholders have previously told Computer Weekly has been held up by Brexit and the Covid-19 pandemic.

These proposals include an urgent call for BEIS to appoint a director of labour market enforcement, which is a post that has remained unfilled since former Tony Blair adviser Matthew Taylor vacated the position in January 2021.

As set out in the policy paper, without a labour market enforcement director in place, there is “no one providing strategic direction” on pushing through the changes required to regulate the umbrella industry.

The changes detailed in the policy paper include establishing whether the best course of action would be to expand the remit of the Employment Agency Standards (EAS) Inspectorate to include umbrella companies or to establish a single enforcement body to oversee the regulation of these entities.

Both options have already been mooted as a means of regulating umbrella companies in the past, with extending the remit of the EAS Inspectorate proposed in the 2017 government-backed gig economy review that was authored by Taylor.

The single enforcement body approach would see HM Revenue & Customs (HMRC), the Health and Safety Executive, the Gangmasters and Labour Abuse Authority and the EAS join forces to oversee the regulation of umbrella companies.

BEIS launched a three-month consultation on the topic of creating a single enforcement body in 2019, the outcome of which is yet to be made public.

Other proposals the policy paper flags as a “matter of priority” include getting the government to consider whether umbrella companies should become licensed entities, and to ensure that any legislation created to regulate umbrellas also prioritises the protection of workers.

Slow to respond

The UK government has found itself repeatedly accused of failing to act quickly enough to regulate umbrella companies, despite warnings about the proliferation of non-compliant players ahead of the IR35 tax avoidance reforms coming into play in the private sector on 6 April 2021.

When the same reforms were rolled out to the public sector in April 2017, it led to a surge in the number of end-client organisations introducing hiring polices that banned the use of limited company contractors in favour of individuals who provided their services through umbrella setups.

As a result, the number of contractors working through umbrella companies soared, and anecdotal evidence suggests the same has happened now that the same reforms have come into force in the private sector.

With so many contractors now working via umbrella companies, the need for regulation is becoming ever more urgent, said James Poyser, who worked with Seeley Harris on the policy draft, and is the founder of anonymous contractor feedback site Offpayroll.org.

“The umbrella industry has ticked along in the background for years and no one’s really questioned it, and then suddenly there’s lots of people having to work through umbrella companies for the first time. Also, it’s a very different type of person entering the market,” he told Computer Weekly.

“We’ve got some very intelligent and engaged contractors here who can quickly sniff out any problems with umbrella companies that might have gone unnoticed before, and asking lots of questions and requiring second opinions on the pay and treatment they are receiving.”  

Poyser added: “We’re seeing hundreds and hundreds of umbrella payslips [via Offpayroll.org] and they show there are some not very nice things going on. Things that might not be unlawful, but they’re certainly unethical and legislation is needed to target some of the problems we’re now seeing.”

As previously reported by Computer Weekly, a series of group litigations are being prepared to reimburse contractors who have had employers’ national insurance contributions at 13.8% unlawfully deducted from their gross pay by umbrella companies.

Some non-compliant umbrella companies are also known to employ disguised remuneration techniques, such as paying contractors in non-taxable loans, to bolster the take-home pay of the individuals on their books, which has resulted in thousands of IT contractors facing life-changing tax bills after being caught in-scope of the UK government’s controversial loan charge policy.

Also, a BBC Radio 4 investigation published evidence in early May 2021 about how mini-umbrella companies are exploiting government-backed small business incentive schemes to artificially minimise the amount of employment tax they pay, resulting in “hundreds of millions of pounds” in lost tax for the Exchequer.  

Poyser said that while disguised remuneration and mini-umbrella tax fraud are headline-grabbing stories, there are other dubious behaviours that non-compliant umbrella companies engage in that regulation would also help to stamp out.

“What we’re seeing is really widespread, smaller abuses and examples of unethical practice, akin to when software developers in the 1980s would roll out one line of code that could steal a penny from every back account,” said Poyser. “On its own, it might go unnoticed, but when you add up altogether what’s been lost, there’s millions of pounds. That’s the kind of thing we’re starting to see with umbrella companies.”

The practice he is referring to here is known as “skimming”, whereby small sums of money are pocketed from the contractors’ weekly pay packet by the umbrella without them realising. It is commonplace within the industry, based on the payslips anonymously supplied to OffPayroll.org, claimed Poyser. 

“There are two very well-known umbrella companies that we’re tracking and their payslips don’t reconcile, in that every single payslip [we’ve seen] is out by the tune of £2 to £10 a week, and it’s small enough to go unnoticed, but it’s a big old chunk of money if that happens to 5,000 contractors, all working for the same umbrella,” he said.

At the same time, Poyser’s company OffPayroll.org has been fielding anonymous reports from contractors who claim the umbrella companies they are employed by are withholding their unused holiday pay entitlement from them.

The majority of umbrella companies operate an accrued holiday pay model, whereby the contractor accumulates holiday pay over the course of a calendar year, but if they do not claim it before the year ends, the umbrella keeps it.  

“It is very tempting to do because all the umbrella company has to do is let sleeping dogs lie, because they’re not obliged to pay out any unused holiday pay – they just have to hope the contractor doesn’t remember to request it,” said Poyser. “Because if they don’t request it, and it’s the end of the holiday year, then the umbrella company gets to keep that money.    

“There is also no statutory legislation that tells umbrella companies that they need to notify contractors that they need to take holiday.”

And that’s not all – Poyser also shared instances of umbrella companies erroneously making contractors pay national insurance on their pension contributions when it is not due, before pocketing it themselves. 

The reasons why non-complaint umbrella companies behave in this way can be traced back to the very thin margins on which many of these firms operate, said Poyser.

“The umbrella company will charge the contractor £20 a week for their services as their source of income, but there will be kickbacks, referral fees and marketing funds that they have to pay to the employment agencies, which can be pretty eye-watering too,” he said.

According to industry estimates, at least 75% of an umbrella’s income is paid out to employment agencies in the hope they will include them on their lists of “preferred payroll suppliers”.

“If 75% of an umbrella’s income goes straight back to a recruitment agent, that leaves them with £5 a week per contractor on which to run a business,” said Poyser. “So if you can sneak an extra pound or two out of somebody’s payslip each week, it has a really profound impact on their profits.”

And until the government delivers on its promise to regulate the sector, these “unethical practices” are set to continue, with Poyser feeling that umbrella companies would benefit from becoming licensed entities, as suggested in the policy document, in the same way that financial services providers are.

“At the moment, if you want to do well as an umbrella company, you’ve got to push the limits into quite unethical practices [because of the margins involved], but for the companies that are operating ethically, it would level the playing field,” he said.

“From a contractor’s point of view, the contractors are absolutely gasping for this market to be regulated, because at the moment they don’t know what is and what isn’t OK for umbrella companies to do.”

The draft policy put forward by Seeley Harris and Poyser has won support from the Loan Charge All-Party Parliamentary Group, which recently called on the government to pick up the pace of its plans to push through regulation for umbrella companies in its How contracting should work report.

The Association of Independent Professionals and the Self-Employed (IPSE) has also called on the government to closely consider the recommendations made in Seeley Harris and Poyser’s draft policy document.

“The time for much tighter regulation of umbrella companies is long overdue,” said IPSE policy director Andy Chamberlain. “The recent controversy over mini-umbrellas is the tip of the iceberg. While some umbrellas companies are entirely compliant, many others are not.

“For years, the government has been aware of tax avoidance schemes being peddled by umbrellas and highly questionable practices around holiday pay. The cavalier and hasty implementation of the off-payroll working rules in the private sector has pushed yet more individuals into the wild west of the umbrella market, which exacerbated pre-existing problems. Government must address this issue as a matter of urgency.”