In recent years, the UK government has turned its attention towards the burgeoning issue of tax non-compliance within the umbrella company sector. This focus has culminated in a comprehensive consultation aimed at identifying and implementing measures to curb practices that undermine the integrity of the tax system and the rights of workers. The consultation seeks to address the complex challenges posed by some umbrella companies, which, while providing essential services within the labour market, have also been associated with non-compliant activities that range from tax evasion to the unfair treatment of workers.

Overview of the Consultation

The objectives of the UK government’s consultation are clear and multifaceted: to tackle tax non-compliance head-on, ensure fair treatment for workers, and create a level playing field for all businesses within the umbrella company sector. By soliciting views from a broad spectrum of stakeholders, the government aimed to gather insights and proposals on the most effective strategies to achieve these goals.

Focus of Analysis

This article focuses on the government’s suggestion to mandate due diligence as a key tenant of its strategy to combat tax non-compliance within the umbrella company sector. This approach is favoured by us for several reasons 1) it promises to enforce a standard of transparency and accountability across the board 2) minimises the risk of non-compliance, and 3) safeguards the rights and earnings of workers. By examining the rationale behind this proposal, its potential impact, and the challenges it seeks to address, we aim to shed light on why mandatory due diligence stands out as a practical and effective solution.

The Need for Change

Current Challenges

The umbrella company sector, despite its significant contributions to the UK’s flexible labour market, has been marred by instances of tax non-compliance and questionable practices. These range from opaque fee structures and the withholding of holiday pay to more egregious forms of tax evasion. Such practices not only disadvantage workers but also undermine the tax system and unfairly disadvantage compliant businesses. The need for regulatory intervention has never been more apparent, as these challenges continue to erode trust and fairness within the sector.

Impact on the Supply Chain

The repercussions of tax non-compliance in the umbrella company sector ripple throughout the entire supply chain. Workers, often the most vulnerable link in this chain, may find themselves deprived of their rightful earnings and benefits. Compliant businesses face unfair competition from those that cut corners, creating an uneven playing field that can stifle quality and innovation. Moreover, the broader economy suffers as tax revenues, which fund essential public services, are undercut by non-compliant activities. Addressing these issues is not just a matter of regulatory compliance but of ensuring the sustainability and integrity of the labour market as a whole.

Analysis of Proposed Options

Option 1 – Mandatory Due Diligence

The mandatory due diligence approach requires businesses engaging with umbrella companies to conduct thorough checks to ensure compliance with tax laws and worker rights. This measure aims to enhance transparency and accountability within the sector, requiring companies to verify the legitimacy and compliance of their partners.

Advantages of Mandatory Due Diligence

• Ensuring Compliance – By mandating due diligence, this approach directly targets the root of tax non-compliance, ensuring that all umbrella companies adhere to tax laws and employment rights, thereby protecting the integrity of the labour market.
• Scalability – The approach is scalable, allowing for adjustments based on the size and capacity of the business, making it applicable across the sector without imposing undue burdens on smaller entities.
• Worker Protection – It prioritises the protection of workers by ensuring they are employed by compliant companies, safeguarding their rights and entitlements.

Disadvantages of Mandatory Due Diligence

• Implementation Challenges – The requirement for due diligence could present operational challenges, particularly for smaller businesses that may lack the resources to conduct thorough checks.
• Potential for Increased Costs – Ensuring compliance may lead to increased operational costs, which could be passed down to workers or result in higher charges for end clients.

Option 2 – Tax Debt Transfer

This proposal suggests transferring tax debt from non-compliant umbrella companies to other parties within the supply chain, such as recruitment agencies or end clients, if the umbrella company fails to meet its tax obligations.

Advantages of Tax Debt Transfer

• Recourse for Non-Compliance – Provides a mechanism to recover unpaid taxes, ensuring that tax liabilities are met even if the umbrella company is unable or unwilling to comply.
• Incentive for Due Diligence – Encourages all parties in the supply chain to conduct their own due diligence to avoid inheriting tax debts, potentially leading to a cleaner industry.

Disadvantages of Tax Debt Transfer

• Disruption and Liability – Could introduce significant disruption and increased liability for compliant businesses, unfairly penalising those who have conducted their operations in good faith.
• Unfair Penalties – The risk of transferring debt could penalise businesses that have limited control over the compliance of umbrella companies they engage with, leading to potential unfairness.

Option 3 – Deeming the Employment Business as the Employer

Under this proposal, the employment business that supplies the worker to the end client would be deemed the employer for tax purposes, shifting the responsibility for tax compliance and PAYE directly to them.

Advantages of Deeming the Employment Business as the Employer

• Simplification of Tax Responsibilities – Could simplify the process of tax collection by consolidating tax responsibilities with the employment business, making it clearer who is accountable for tax compliance.
• Potential for Improved Compliance – By centralising responsibility, this approach might lead to better overall compliance within the sector.

Disadvantages of Deeming the Employment Business as the Employer

• Operational Challenges – Redefining the employer could introduce significant operational challenges, requiring businesses to overhaul their current payroll and tax processing systems.
• Confusion Over Responsibilities – This shift could lead to confusion regarding employer responsibilities, especially concerning employment rights and benefits.
• Risk to Worker Arrangements – There’s a potential risk of pushing workers into more precarious arrangements as businesses attempt to navigate the complexities of this new responsibility, possibly leading to a reduction in the use of umbrella companies and an increase in less secure forms of employment.

Each of these proposals offers distinct approaches to addressing tax non-compliance within the umbrella company sector, with varying implications for compliance, operational impact, and worker protection.

Advocacy for Mandatory Due Diligence

Umbrella Check strongly advocates for the mandatory due diligence option as the most effective approach to combat tax non-compliance within the umbrella company sector. This stance is rooted in a deep understanding of the industry’s needs and challenges, as well as the comprehensive solutions offered by us.  Below, we expand on why this approach is most suitable, aligning with industry practices, offering significant benefits over other options, and suggesting an effective implementation strategy.

Alignment with Industry Practices

Mandatory due diligence aligns seamlessly with existing best practices within the industry, particularly as embodied by the Umbrella Check process. Umbrella Check’s proposition is built around thorough and robust checks on umbrella companies, ensuring they adhere to tax laws and employment rights. This approach not only fosters transparency and accountability but also champions the protection of workers and compliant businesses alike. By mandating due diligence, the industry can standardise these rigorous checks, making them a universal requirement rather than a voluntary best practice. This alignment ensures that all stakeholders are held to the same high standards, promoting fairness and integrity across the sector.

Benefits Over Other Options

In our opinion, the mandatory due diligence approach offers several key benefits over the alternatives of tax debt transfer and deeming the employment business as the employer for tax purposes. 

• Enhanced Compliance – Unlike the tax debt transfer option, which places undue burden and potential liability on compliant businesses, mandatory due diligence proactively prevents non-compliance by ensuring all parties meet their obligations from the outset.
• Market Stability – By avoiding the operational upheaval associated with redefining the employer, mandatory due diligence maintains market stability, allowing businesses to focus on growth and innovation rather than navigating new regulatory complexities.
• Worker Protection – Central to the Umbrella Check model, and by extension to mandatory due diligence, is the unwavering commitment to protecting workers. This approach ensures that all umbrella companies provide fair treatment and full entitlements to their employees, a fundamental aspect that might be jeopardised under the other proposed options.

Implementation Strategy

Whilst we advocate for a due diligence-based approach, whatever the outcome for the consultation we support a well thought out and measured approach which considers all the consequences.  The critical success factor will be in the implementation of a framework that benefits the whole supply chain from end client to temporary worker. 

• Inclusive – It must work for umbrella companies of all sizes, ensuring that smaller entities are not pushed out of the market. The diversity of our sector is one of its strengths, and any reforms should support businesses across the spectrum.
• Cost-Effective – The financial implications of implementing due diligence cannot be overlooked. The process must be affordable, ensuring that compliance does not become a prohibitive cost for businesses, especially smaller ones.
• Simple to Implement and Monitor – The success of any regulatory reform lies in its implementation. The due diligence process must be straightforward, with clear guidelines and support for businesses to adopt the practices. Additionally, it should be easy for recruiters to understand and apply, ensuring that compliance becomes a seamless part of operations.
• Sustainable – Ongoing support and monitoring are essential. The framework should include mechanisms for regular checks and updates, allowing businesses to maintain their compliance and adapt to any changes in legislation or industry standards.

Further commentary can be found online at Global Recruiter.  For enquiries about Umbrella Check’s comprehensive supply chain compliance process, contact info@umbrellacheck.org.uk