Government to tackle 'non-compliance' in umbrella company market

A Treasury minister has confirmed that a statutory due diligence scheme for businesses using umbrella companies is being considered

In a written statement to MPs, Nigel Huddleston, financial secretary to the Treasury, said: ‘The government is minded to introduce a statutory due diligence regime for businesses that use umbrella companies and will continue to engage with the recruitment industry and other key stakeholders on the detail of this.’

There will be a penalties regime for non-compliance to clamp down on abuse of the labour supply chain.

In addition, HMRC will publish new guidance to support workers and businesses that use umbrella companies. This will include an online pay checking tool.  

The government stressed that it ‘remains concerned about the scale of non-compliance in the umbrella company market, and the detrimental impact that this has on workers, taxpayers and the labour market’.

However, there has still been no official government response to last June’s consultation on measures to reduce tax non-compliance in the umbrella companies market.

At the time, the Treasury set out proposals to strengthen protection for contractors who use umbrella companies by creating a legislative framework and reviewing employee pay processes and tax liability. It also wanted feedback on plans to regulate the umbrella company market by putting the agencies on a statutory basis with a clear definition to ensure they are covered by any relevant legislation.

The government estimated that there were up to 1.7m temporary workers in the UK, many of whom use employment intermediaries to secure work. Frequently workers are paid by umbrella companies, often in a mix of taxed national minimum wage and untaxed ‘loans’ or share schemes, contrived by the umbrellas specifically to avoid tax.

The response to the consultation is expected to be published ‘in due course’, but the Treasury did not provide a specific date or month for this.

Susan Ball, employment tax partner at RSM said: ‘As we eagerly await further details of last summer’s consultation, some elements of it appear to have been set aside, and were conspicuously absent from today’s Tax Administration Day summary.

‘There is no mention of the transfer of payroll tax debt from non-compliant umbrella companies to the recruitment agency or end-client, or imposing PAYE and NIC obligations on recruitment agencies that supply workers who are employed by umbrella companies. Concerns on these points may remain though until full details of the consultation are disclosed.’

Plans for mandatory due diligence could provide some reassurance for businesses, but there are concerns that the measures will not be introduced any time soon with an election this year. 

Paul Newsham, CEO of Payroll Compliance Authority (PCA), said: ‘It’s disappointing that the update promised in the Spring Budget is so brief. Whilst the details are thin on the ground at this stage, I’m reassured that some form of statutory due diligence requirement is on its way, albeit not in the short term.

‘For recruitment businesses, carrying out effective due diligence is extremely challenging and fraudulent operators are masters at appearing genuine, but with so much illegal activity, tightening up on due diligence is the quickest way to clean up the sector.

‘This is our mission at the PCA, to flush out unscrupulous players through our rigorous and ongoing audit of umbrella company members, so businesses can be sure that they are engaging transparent, ethical, and legitimate payroll firms.’

The measure was one of a very limited number of announcements made as part of Tax Administration Day.

The only consultation of note was a complex proposal for VAT changes for private vehicle hire operators as a result of last year’s Uber case at the High Court.

There was also a teaser about future plans for VAT breaks for business charitable giving and plans for a legislative change to introduce mandatory postcode provision about employees by any business operating in a freeport or investment zone in order to qualify for Class 1 NICs relief.

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