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UK government proposes legislation to regulate umbrella companies

'Mixed bag' of solutions await tech workers forced into IR35 alternatives

The UK government has taken a step closer to regulating umbrella companies – which have seen their popularity skyrocket in the wake of off-payroll tax reform – by seeking to define them in law and establish an enforcement body.

Both proposals are in their early stages as politicians consider their options in response to allegations of sharp practices among umbrella companies, which have become necessary among some of the IT workforce looking for an alternative to off-payroll working following the introduction of IR35, the controversial tax reform for those working as contractors.

In a consultation paper launched this week, the government admitted that umbrella companies were essentially unregulated.

Umbrella companies take responsibility for paying contractors and casual workers from employers and agencies, but they are also responsible for ensuring workers get holiday pay, sick pay and pensions in accordance with employment law. In 2021, The Register reported that some umbrella companies were failing to pass on holiday pay or siphoning off pay with hidden fees.

"Chapter 3 sets out the options the government is considering to address employment rights issues within the umbrella company market such as pay, or holiday pay, being withheld," said the consultation paper published jointly this morning by the Treasury, His Majesty's Revenue & Customs, and Department for Business, Energy & Industrial Strategy.

However, before it moves to regulate umbrella companies, the government would need define them, firstly using primary legislation and giving ministers the powers to make regulations containing requirements for umbrella companies. Then it would need to consult after the definition had become law on the specific requirements to be placed on umbrella companies before implementing them, the document said.

In its summary of industry consultation [PDF], the government said 95 percent of those working for umbrella companies had no option if they wanted to take a particular role.

"A number of workers explained that they had previously worked through [personal service companies] but that end clients had moved away from engaging people in this way, citing the reforms to the off-payroll (IR35) working rules, and would only offer roles through umbrella companies," it said.

Julia Kermode, CEO of umbrella company compliance specialist PayePass, said the government's proposals were "a mixed bag."

"There are some valid proposals, like ensuring proper due diligence is carried out on umbrella companies and holding the supply chain accountable if they fail to do so. But at the same time, the government is putting forward ideas which need real work and threaten how the wider recruitment sector operates," she said. ®

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