The second consultation on umbrella company regulation closed in August 2023, and the industry is still waiting for news and in need of regulation, so what can we expect the Government to do next?
A legal definition of an umbrella company
There isn’t currently a statutory definition of an umbrella company, so while there is a broad consensus within the contracting industry about what an umbrella does, anyone can use the label - and they’re free to decide for themselves what they mean by the term.
The lack of a legal definition also makes it impossible to legislate specifically for umbrella companies, so the first eagerly awaited event is a legal definition. This will require primary legislation, which can often take a long time. So, what can we expect this definition to look like?
Option 1 - limiting permitted engagement methods
This option would define four permitted methods for the engagement and payment of temporary workers, one of which would be umbrella company employment. This option would only seek to regulate recruitment agency supply chains.
Option 2 - defining an umbrella company by applying tests
The other proposed option would involve three conditions a business should meet to be considered an umbrella company, and therefore to be affected by targeted legislation. This option would not set out other permitted engagement methods.
Umbrella company standards
Once they’ve settled on a definition, the next stage is to set out minimum standards for the behaviour of umbrella companies.
Depending on which line the Government decide to take, this may involve minimum standards in a few key areas of concern, for example holiday pay, running PAYE correctly etc, or it could include a wider code of conduct setting out how umbrella companies should perform their function of supporting recruiters and their umbrella employees.
Tackling tax non-compliance
The Government’s other stated priority is to reduce Treasury losses due to tax non-compliance. The consultation set out three possible options for this:
Mandatory due diligence, which would see a legal requirement for recruitment agencies or end clients to check that any umbrella they work with is fully compliant
Transfer of debt, which would see recruitment agencies or end clients being made responsible for any unpaid taxes resulting from non-compliant umbrella companies
Making the recruitment agency the “employer for tax purposes” and therefore responsible for ensuring correct operation of PAYE, even where they outsource employment to an umbrella company.
Enforcement of umbrella company standards
The consultation invited views on which body should be responsible for enforcing any new umbrella company standards, but their preferred option is to extend the remit of the Employment Agencies Standards Inspectorate (EAS) who are already responsible for regulating recruitment agencies.
The Government has also made a separate commitment to create a single enforcement body, and the consultation notes that the EAS could be incorporated into this.
Any move towards regulation of umbrella companies has to be seen as a good thing, though it is clear that there’s a long way to go. For now, it’s important that recruiters and contractors don’t get involved with non-compliant umbrella companies, and with tax avoidance schemes in particular.
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