Umbrella employment companies: call for evidence

Update - For details of the consultation that followed with the response to the Call for Evidence, see our article “Umbrella companies consultation: tax aspects”.

The government has published a call for evidence on the role of umbrella companies in the employment market and in particular the tax risks that they pose. The aim of the call for evidence is to gather further information about the role that umbrella companies play in the jobs market and what risks, both to workers and to government revenues, umbrella company structures pose.

There are no specific proposals for further regulation proposed at this stage (beyond the existing intention to bring such companies within the scope of the regulations which currently apply to other employment agencies) and the call for evidence is intended to help the government decide what, if any, further policy actions may be necessary.

Nevertheless, it is clear that the government has significant concerns about the role that umbrella company schemes play in tax avoidance and tax evasion and that, as the use of such structures is increasing at a rapid rate, the government will consider further action if necessary.

Background

Umbrella companies in this context are companies that typically employ a worker and provide payroll services for that worker, but do little more than that. A typical arrangement involving an umbrella company would involve an employment bureau finding work for a worker with a client. However, the worker would be engaged under an employment contract with a separate umbrella company with the employment bureau entering into arrangements with the umbrella company to on-pay monies received from the client to the umbrella company (less the employment bureau fee). As such, the monies for the services of the worker will pass from client through the employment bureau to the umbrella company before being paid as salary to the worker (less fees at each stage).

The call for evidence notes that there has been a steep increase in the use of umbrella companies over recent years. It estimates that in 2007 there were around 100,000 such businesses growing to 300,000 in 2015 and now an estimated 600,000.

There are a number of potential advantages of using umbrella company arrangements:

• Workers who work on a number of short term contracts may maintain continuity of employment with the single umbrella company. However, equally there is evidence that workers may consider that they have little choice but to provide their services through an umbrella company arrangement as some employment businesses and clients will only use such arrangements.
• End clients do not have the administrative burden of employing workers directly.
• Employment businesses equally can simplify their administrative operations by using umbrella companies. Although, as an alternative, an employment bureau could use the services of a payroll company, the ultimate responsibility for operating PAYE etc would still reside with the employment bureau. By using an umbrella company, that responsibility is shifted to the umbrella company.
• Using an umbrella company arrangement means that an employment business is not required to treat workers as their own employee for tax purposes.

The call for evidence recognises that umbrella companies play a role in the labour market by facilitating the engagement of temporary workers. However, unlike employment bureau, umbrella companies are not currently regulated, though that is due to change as the government intends to bring umbrella companies within the same regulatory framework as employment agencies and employment businesses. The aim of the call for evidence is to enable the government to better understand the role that umbrella companies play and the risks, especially in relation to tax, that they pose.

Umbrella company tax risks

The government is clearly concerned that, whilst the vast majority of umbrella companies operate within the law, correctly operating PAYE and NICs, they do offer opportunities for the unscrupulous.

One of the key areas for concern for the government is that umbrella company structures are often used to facilitate the use of tax avoidance structures, such as disguised remuneration schemes. The call for evidence notes that there has been a shift away from such schemes being promoted to smaller employers and now a much greater proportion of such schemes are targeted at individuals such as contractors or agency workers. The call for evidence suggests that umbrella company structures are the favoured method for facilitating this type of tax avoidance arrangement because of the ease with which they can be established and subsequently liquidated. Such companies would normally employ the worker and pay them the national minimum wage as a salary subject to PAYE and NICS, but the remainder of the monies would be routed, often through an offshore intermediary, untaxed as a loan, annuity or other payment.

Another concern for the government is the use of what it terms mini umbrella company fraud. This involves the disaggregation of a larger umbrella company workforce into a large number of smaller umbrella companies, each typically employment a few employees. This is done in order to claim tax reliefs aimed at smaller businesses such as the employment allowance (providing relief from NICs) and the VAT flat rate scheme (allowing for VAT to be calculated as a fixed rate on turnover).

Beyond facilitating tax avoidance, the government is also concerned that umbrella companies simply facilitate fraud. An payroll intermediary such as an umbrella company may simply tax the required payroll deductions of income tax and NICs and simply fail to declare them and disappear.

From a VAT perspective, the call for evidence also notes that the umbrella company structure may result in the incorrect treatment of supplies as exempt or the declaring of output VAT only on part of the consideration received by such companies as a payroll fee. The recent decision of the Upper Tribunal in Mainpay Ltd is an example of the difficulties that can arise in this scenario. For more details of this case see Supplies of staff or supplies of underlying services.

Comments

The call for evidence is open for responses until 22 February 2022 and responses should be emailed to umbrellacompanyevidence@hmtreasury.gov.uk

Ultimately, the government notes that it keeps labour market trends under review and will intervene where there is evidence of poor compliance with employee rights and tax obligations. The government intends to use the information gathered through the call for evidence to inform any further policy decisions in this area and will publish a summary of responses in due course.