IR35 reform: New proposals sent to the Treasury to regulate 'deplorable' umbrella industry

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IR35 rules were updated in early April and going forward, medium to large businesses must review and assign the tax status of off-payroll contractors they hire. These changes proved to be controversial as it was believed they would raise costs and hinder the usage of freelancers and self-employed workers.

Rebecca Seeley Harris, Chair of the Employment Status Forum and a leading expert on employment and tax status, and James Poyser, CEO of inniAccounts and founder of offpayroll.org.uk, have submitted a draft policy entitled ‘Umbrella companies – Call for Regulation’ to Jesse Norman, the Financial Secretary to the Treasury and Paul Scully, the Parliamentary Under Secretary of State in the Department for Business, Energy and Industrial Strategy and Minister for Labour Markets.

This policy proposes recommendations on how the umbrella market could be regulated as it is argued there has been “absence of any progress on proposed legislation to date.”

These proposals have been made as it was argued the umbrella industry is currently largely unregulated and there are “many” non-compliant companies abusing the system and costing UK taxpayers.

Rebecca and James broke down how costly this could all be, as they noted:

  • It was estimated £4.5billion is misappropriated mainly from workers but also from HMRC in the sector of employment agencies and intermediaries.
  • A conservative estimate of the value of unpaid holiday pay to umbrella company workers in 2016 was at least £1.8billion. The additional income tax collected on this basis would equate to £300million.
  • The coronavirus pandemic, IR35 and the recent off-payroll working reforms have dramatically increased the use of umbrella companies, potentially exacerbating the problem.

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The policy document itself called upon the government to take urgent action to regulate the sector and to provide much-needed protection for umbrella company workers.

It was argued: “the Government needs to intervene to stop the scandals embroiling the umbrella sector.

“This includes the practice of withholding holiday pay, incorrect payments of employers’ national insurance contributions, and abuse of the employment allowance tax relief. These all amount to £billions in misappropriation to HMRC and workers. The use of tax avoidance schemes, including the use of so-called ‘mini umbrella companies’ are estimated to cost workers and HMRC around £1billion annually.

“Today it is estimated there are 500 ‘self-regulated’ umbrella companies managing the payroll for 600,000 umbrella company employees. Umbrellas have become a popular vehicle for companies and organisations, managing a temporary workforce to comply firstly with IR35 and now more recently with the off-payroll working rules in the private and public sector.

“However, with mounting evidence of malpractice reported by umbrella employees, the policy document draws the government’s attention to widespread non-compliance of both tax and employment law and the consistent breach of worker’s rights by rogue umbrella companies.”

Rebecca commented on the importance of tackling these issues: “I drafted the policy to help the Government focus on the task in hand and work with industry experts to ensure any legislation provides robust regulation and protection for workers. It is paramount that the regulation of this industry is expedited because of the rise in the use of umbrella companies as a result of both the Coronavirus pandemic and the off-payroll working rules forcing people through non-compliant umbrellas.

“The abuses in the labour market supply chain, as a whole, need attention and it may be that the government can look at the bigger picture, including legislation such as IR35 and the off-payroll reforms, because it drives immoral behaviour. The issues concerning employment status in the UK are the driving force behind the use of umbrella companies – it is simply irresponsible to let it continue unregulated. I also believe it’s about time the government responded to the Employment Status consultation that closed in 2018.”

James Poyserm the CEO of inniAccounts and founder of offpayroll.org.uk, concluded on this: “Ahead of new off-payroll reforms coming into force in April, 71% of employees deemed ‘inside IR35’ were moved into umbrellas.

“The breadth and scale of the stories of malpractice, scams and skimming are distressing and deplorable. It’s clear that ‘accreditation’ and self-regulation of this market is simply not working, and instead has created cartel-like behaviours and unethical practices. It is a fair and reasonable statement to say that umbrella workers are a revenue-generating commodity for the supply chain to exploit.

“We have witnessed payslips that don’t reconcile, deductions taken from workers but not paid to HMRC, holiday pay being unfairly pocketed, workers forced to use a single umbrella company with artificially inflated fees and agree to ‘opt-out’ of worker protections. These practices are prolific, including amongst the most well-known ‘accredited’ umbrella companies. Any layperson who lifted the lid on the industry would quickly



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