The closure of the HM Treasury umbrella company market consultation on February 22nd marked the next stage for the government's review of workforce compliance and the protection of those in the labour force.
Launched in November 2021, the consultation called for evidence from stakeholders on "the role that umbrella companies play in the labour market and how they interact with the tax and employment rights systems".
It outlined the government's actions to tackle non-compliance on tax, and to improve the protection of those in the umbrella workforce.
By considering the responses received, HM Treasury now plans to develop further policy to protect workers even more, based on up-to-date practices in the labour market.
The consultation added: "Future regulations will aim to protect workers' rights and continue to allow businesses to operate flexibly."
Why now?
Umbrella companies have seen increasing worker numbers in recent years, spurred on by the conditions in place during the COVID-19 pandemic and by the extended off-payroll rules introduced in April 2021.
Since those rules came into effect for medium and large private sector clients, it has been the client's responsibility to determine the correct IR35 status of the contractors they use.
By working under an umbrella company, contractors benefit from security while being able to demonstrate their employee status to potential clients - avoiding the uncertainty of leaving it to the client to make that determination.
Why is the consultation needed?
Following the introduction of the off-payroll working rules, the TUC warned that umbrella company exploitation could increase as a way for companies to "shirk their tax and employment rights obligation".
This has been seen, for example, in the rapid rise of disguised remuneration schemes, where a contractor receives only a small portion of what they earn via PAYE, while the rest of their income is disguised as a loan or similar.
When HMRC takes enforcement action on such schemes, it is normally the contractor who is ordered to pay the tax on the disguised amount - allowing the company to avoid paying the bill.
Safeguarding contractors
Contractors are not always able to identify a tax avoidance scheme - in fact the IR35 Impact Survey by IR35 Shield found nearly four in five (78%) cannot spot an avoidance scheme.
The TUC's initial recommendation was a complete ban on umbrella companies. However, many tax-compliant umbrella companies continue to provide important services for the contractors working under them.
When an umbrella company is fully compliant, this can include making the appropriate and necessary deductions across a variety of taxes like income tax and national insurance contributions, eliminating the need to self-assess.
Umbrella companies may also offer a range of employee benefits, such as paid holidays, paid sick leave, and a continuous contract of employment for the duration of the contractor's work.
How to find a reliable umbrella company
As the consultation moves into its next phase, the government will now review the feedback received from stakeholders - with a summary of responses due to be published at an unspecified later date.
In the meantime, you can continue to safely benefit from umbrella company services by knowing what to look out for.
A trustworthy umbrella company will generally apply industry-standard rules to comply with tax and other regulations - and that means as a contractor, your take-home pay should not be much different regardless of your choice of umbrella company.
If an umbrella company is promising to deliver a substantially higher take-home pay, it is probably a sign that their terms and conditions are not fully compliant with HMRC rules, and you could be landed with a huge tax bill and penalty fees further down the road.
Equally, you should avoid taking payment from your umbrella company in unusual ways, such as grants and loans, or as a cash advance - any of these could be part of a disguised remuneration scheme.
Primis are accredited by Professional Passport, the largest independent assessor of compliance in the payment sector. The Professional Passport Umbrella Accreditation demonstrates our high standards of business and reassures our clients that our services have been independently audited.
To learn more about Primis, contact our team by filling in the form on our Contact Us page, emailing sales@primisuk.com or calling 01925 912200.