The co-chair of the Loan Charge APPG report on the contracting industry has effectively called for an end to umbrella companies by suggesting the government strike out part of its Finance Bill.
Speaking in parliament the week after the APPG’s How Contracting Should Work document was published, Ruth Cadbury MP launched a scathing attack on the umbrella industry.
“The unintended consequences of IR35, off payroll legislation, has been a proliferation of umbrella companies, some of which have pushed people into disguised remuneration schemes,” she said.
She added that the APPG report had, “exposed significant malpractice, including withholding holiday pay and kickbacks for recommending or passing on contractors, even including providing fitted kitchens and holidays for recruitment agency directors”.
Opportunity for change
While she said that long term an alignment of tax and employment laws was needed, Cadbury suggested the government now had an opportunity to stamp out bad practices by making changes to Clause 21 of the Finance Bill, which deals with workers provided by intermediaries.
“The government could simply strike out Clause 21, which would then ensure workers got the agency rights they should be getting. Agencies can run their own payrolls, they do for their own staff anyway, they do not need umbrella companies and neither do their contractors.
“Or, the government could redraft Clause 21 to seek to stop the exploitation but they must do one or the other.”
She said some schemes were not transparent about tax avoidance during the sales process and had caused “misery” for workers.
“The government and HMRC are well aware schemes are still being mis-sold to people, including mid and low paid public service workers, nurses, doctors in the NHS and other clinical specialists, teachers and social workers. And also many in the private sector, IT, business services and so on.”
Levelling the playing field
However, Dave Chaplin, CEO of contracting authority ContractorCalculator, said he did not think it was likely the government would follow Cadbury’s suggestion. “Why should the honest umbrella companies suffer because of the few that are up to no good,” he asked?
“The alternative option is to update the existing Finance Bill to rule out skulduggery, and make all umbrellas operate on a level playing field. That would be the more sensible way forward, and there are some options that might be possible.
Crawford Temple, CEO of Professional Passport, expressed a similar view. “Closing down a whole sector that provides such crucial support to the entire contingent workforce would be an over-reaction. We agree with Ruth Cadbury and have indeed been making the point to HMRC for many years that limiting the ability of disguised remuneration and non-compliant operators to enter the market is essential.
“However, the proliferation of these arrangements is a direct consequence of ill-thought through legislation with the responsible stakeholders in the sector all aligned on highlighting these problems in their responses to previous consultations that have been ignored.
“I would suggest that a collegiate and joined-up approach is what is needed right now to drive up standards and stamp out the unethical practices that are giving the entire sector a bad name.”
More enforcement needed
Phil Pluck, chief executive of the Freelancer & Contractor Services Association, which gave evidence to the APPG for its report, added that it is not only regulation but also enforcement action that is needed.
“The key suggestion is that regulation should apply to the umbrella sector, which the FCSA has been campaigning for for a number of years. But we would go further and say that this also requires robust and visible policing. HMRC are caught between maximising tax revenue and prosecuting tax avoidance criminals. This conflict means that not enough prosecutions end in convictions and not enough directors see the inside of a prison cell.”
He said IR35 reform made this need all the more pressing. “The IR35 reforms will see an increase in contractor numbers and an increased opportunity for unscrupulous agencies and umbrella firms to further exploit this population.
“The FCSA is already looking at how it can bring in greater compliance standards in order to create a more transparent and fairer playing field for these workers but the government must stop dragging its heels on regulation and the resources to prosecute unlawful elements in this market.”
Clarke Bowles, Director of Strategic Sales at Parasol Group, backed the call for more enforcement. “Investing time pressing government for a single enforcement body helping to drive proper regulation would be far more effective than making sweeping statements about an entire industry, most of whom uphold very high standards of compliance.”
Bowles added that Cadbury’s dismissal of the need for umbrella companies was misguided. “A quote from Ruth during the speech said ‘The legislation as originally drafted would have meant that the agency would have to put the worker on their own payroll where they would have enjoyed the protections of existing agency legislation.’
“This ignores the fact that agency workers employed by a compliant umbrella company already enjoy and benefit from full employment rights. Whilst there is no obligation on the fee payer to offer employment rights, adopting this strategy could create large numbers of zero right employees, creating a much bigger issue.
“Ruth suggests that clause 21 be struck out and recruitment agencies run their own payroll ‘as they do anyway for their own staff.’ This completely ignores the complexity of fee payer responsibilities, deductions and the benefits for temporary workers that come with the continuity of employment, benefits packages, employment rights and protections.
“In addition, not all recruitment businesses are able to run their own payrolls, many simply do not have the resources, infrastructure or expertise to do so.”
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