Proposed amendments to UK Finance Bill target rogue umbrella companies ripping off contractors after IR35

Conservative MPs offer tweaks to stamp out suspect practices

Conservative MPs David Davis, Sir Iain Duncan Smith, and Andrew Rosindell have put forward amendments to the UK's 2021 Finance Bill in a bid to rein in umbrella companies said to be skimming off earnings from contractors and holding back holiday pay.

This week, the UK Government was urged to introduce legislation to clamp down on intermediary employment firms, which campaigners say have mushroomed as companies and temp agencies avoid directly hiring contractors judged to fall within the IR35 "off-payroll working" tax law.

James Poyser, CEO of inniAccounts and founder of campaigning website offpayroll.org.uk, said the flood of new contractors into umbrella companies was exacerbating problems with a largely self-regulating system.

New amendments [PDF] to the 2021 Finance Bill, which is set for its third reading in Parliament, promise to help curb the suspect practices.

In the proposals, umbrella companies will be allowed to operate providing workers have no material interest in the company. They would allow the umbrella company to receive payment from temp agencies providing the entire amount is processed as earnings, including the total cost of employment, less a "transparent intermediary margin". At the end of the engagement, any outstanding holiday pay should be paid, all employment rights – including agency workers' rights – should be maintained and no payment should be given to any other party, the amendments stipulate.

The appointment of a director of Labour Enforcement was also included in the amendments.

What is IR35?

IR35 is a tax reform that was unveiled in 1999 by the UK tax authorities.

The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.

The latest regulation change will force businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves. This has already been the case in the public sector for years. The change that happened in April means the rules now apply to medium and large firms in the private sector too.

Contractors found to be within the scope of the legislation – ie, inside IR35 – will have to pay more tax than they might expect.

IR35 does not apply to small businesses, defined as having "a turnover of £10.2m or less; a balance sheet total of £5.1m or less; and/or 50 employees or fewer."

New IR35 rules introduced last month require medium and large employers to assess whether contractors meet HMRC's definition of self-employment.

The reforms made businesses (medium and large only) responsible for determining the tax status of contractors, rather than the contractors themselves, and many put in place blanket bans on techies employed via their own personal service companies (PSCs).

Contractors judged to be inside IR35 under the new rules often end up employed by umbrella companies. Umbrella firms take the untaxed income from an employer or agency and run the payroll, hand over the taxes and national insurance to the UK's tax collection agency, HMRC, and pay the net pay to the contractor. Among the dubious practices employed by umbrella companies, which offpayroll.org.uk has seen evidence of, are attempts to impede holiday pay or entitlement and adding hidden fees to payslips.

The amendments to the Finance Bill promising to help stamp out these practices follows an All-Party Parliamentary Group inquiry into "How Contracting Should Work".

Both amendments contain sunset clauses, to ensure the market has until 6 April 2022 to prepare for the changes. They also give the government a year to decide how it plans to either regulate or ban the use of umbrella companies.

Dave Chaplin, CEO of ContractorCalculator, provided evidence and helped draft amendments to the Bill.

He said: "These amendments give the government a year to either 'curb or kill' the unregulated umbrella market. In an unregulated industry, non-compliance in the umbrella sector is reportedly rife and ranges from difficult to spot aggressive tax avoidance schemes to self-proclaimed 'compliant' firms who skim monies from contractors' wages by leveraging a lack of transparency and ignorance on the part of the worker. Moreover, it is estimated that around £4.5bn a year is lost through unpaid taxes and monies withheld from the Treasury and contractors."

Rebecca Seeley Harris, chair of the Employment Status Forum, and Poyser of inniAccounts, who are leading a campaign for regulation, said in a statement sent to The Reg:

"We acknowledge there are umbrellas that do operate above board and that there is a place for fair umbrellas in the labour supply chain, so a ban as proposed in amendment 34 is, in our opinion, not necessary. However, we believe that without urgent intervention from the government rogue practitioners will continue to abuse workers’ rights and evade tax. As such we support any motion that seeks to bring a stop to unethical practices.

"Above all, we would like to see tax and employment regulation work in harmony and reflect the flexible way in which people want to work and employers want to hire as outlined in the Taylor Review of Modern Working Practices." ®