The call for evidence invites views from stakeholders on the role that umbrella companies play in the labour market, and how they interact with the tax and employment rights systems. It sets out the concerns that have been raised by some stakeholders, as well as government action already taken to tackle tax non-compliance and improve protection for workers.
Umbrella companies play a role in the labour market by facilitating the engagement of temporary workers. Umbrella companies employ individuals on behalf of clients and employment businesses. They do not source work for the employee, which is typically done by an employment business further up the labour supply chain. Although workers are employed by the umbrella company, the worker does not provide services to the umbrella company itself. Rather, the workers provide their labour to clients, typically on a short-term basis.
Umbrella companies are responsible for paying salary, deducting tax, National Insurance contributions (NICs) and managing employment rights such as holiday pay, statutory sick pay and workplace pension auto-enrolment. When they are engaged under contracts of employment, umbrella company employees are entitled to benefit from full employment rights subject to qualifying conditions such as length of service. As employees, they should also receive any payments of earnings from their employment after relevant deductions, such as income tax and employee NICs, rather than needing to account for and pay these amounts separately under Income Tax Self Assessment.
The government is aware of concerns regarding non-compliance with employment law, including umbrella companies failing to provide employment rights such as holiday pay, and poor market practices, for example, a lack of transparency over pay rates, fees and charges.
Compliant umbrella companies ensure that the correct tax and NICs are paid. However, HMRC is also aware of tax non-compliance within this sector, which will be contributing to the wider tax gap. The overall tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.
HMRC has evidence of different examples of this tax non-compliance including tax evasion – through the use of mini umbrella companies, and tax avoidance through disguised remuneration schemes facilitated by umbrella companies. Disguised remuneration involves individuals being paid partly by amounts claimed to be non-taxable such as a loan. Similar concerns have also been raised by stakeholders, including in response to a Call for Evidence in 2020 on tackling disguised remuneration.
The Call for Evidence invites views on a broad range of questions regarding the role that umbrella companies play and their utility in the labour market, as well as the ways in which they interact with the employment tax and employment rights systems. It also seeks views on the government’s understanding of the behaviours in the market that are causing concern.
The government is keen that a wide range of experiences of respondents can be captured to give a rounded understanding of the umbrella company market and how it contributes to the overall labour market. This Call for Evidence poses specific questions in chapters two, three and four, which are intended to encourage detailed responses on the government’s primary areas of interest. However, respondents need not limit their comments solely to the questions asked.
The government will continue to undertake further engagement with stakeholders during the Call for Evidence process.
The Call for Evidence can be accessed here:
https://www.gov.uk/government/consultations/call-for-evidence-umbrella-company-market