With the dust settling on the industry’s response to the Tackling Non-Compliance in the Umbrella Company Market consultation, and whilst we await HMRC’s proposals, there is time to consider some possible outcomes.
Feedback from the initial Call for Evidence in 2021 drew out important issues which formed the basis of some questions raised in the latest consultation, which closed in August. One chapter focused on possible options for regulating umbrella companies. In this article we consider those questions, their possible outcomes along with our own views.
Legally defining an umbrella company
As the consultation explained, in order to introduce specific regulation to tackle umbrella companies, government first needs to legally define an umbrella company. This in itself is complex with the consultation tabling two options, neither of which were entirely sound. But once agreed, it will enable government to place specific obligations on umbrella companies.
Enforcing new requirements
There are obvious questions about how new regulation is enforced and by whom. There is likely to be a set of standards and expected attainment of those standards.
The actual enforcement of these may fall to the Employment Agency Standards (EAS) which already regulates employment agencies and employment businesses. This obligation could eventually fall under the scope of a Single Enforcement Body for employment rights – long promised by government but yet to be delivered.
Licensing and regulation
We know from the consultation itself that government is already committed to expand state enforcement to include umbrella companies, but can that mean that it will ‘license’ those companies?
The implication of a licensing arrangement would go beyond mere registration and require applicant companies to demonstrate their ability to meet certain standards. The industry already has a number of self-regulatory or professional trade bodies such as the Freelancer and Contractor Services Association (FCSA) and Professional Passport, which set and monitor standards for compliant umbrella companies.
Licensing as part of a compliant solution
Even government recognises the heavy burden of administration facing business today. The consultation sought ideas for compliance solutions which would not overwhelm smaller businesses in the sector with time and costs. Here at PayStream we support an approach which is fair to the industry as a whole but whatever solution is chosen, licensing or otherwise, will necessarily have to meet a minimum level of compliance to ensure government objectives are met.
Once government has decided on the way forward, and we are not expecting an early response to the consultation, it’s likely there will be another round of discussions with stakeholders before draft legislation is published.
In our view, a licensing solution would need to contain key tests such as:
- A clear set of standards to be met by umbrella companies;
- A programme of regular and effective compliance checks/visits by EAS, HMRC or whomever is nominated as the enforcement body;
- An application process with provisional acceptance and verifiable compliance checks thereafter;
- A published list of accredited umbrella companies regularly maintained and visible to any interested parties;
- Depending upon the nominated responsible body (public or private) an annual accreditation fee set at a reasonable level for all applicants.
There is no doubt that the availability of named, approved and/or accredited umbrella companies would greatly assist contractors, agencies and employment businesses. Contractors would be steered away from rogue umbrellas offering unrealistic pay and benefits, whilst agencies would have the comfort and protection of a compliant partner.
Historically HMRC have shied away from accreditation or approval lists and government has delayed or been reluctant to bring in a Single Enforcement Body, which is probably why this route has not been followed earlier.
We accept that regulation flowing from the consultation, whether it be light touch or heavily legislated, will require significant work and commitment by all parties concerned to develop a model which meets everyone’s needs. Nevertheless, the nettle needs to be grasped and perhaps 2024 may indicate the direction of travel the government intends to take.
