Government delays in fulfilling a promise made in 2018 to regulate umbrella companies, which are employment structures utilized by a large number of freelance workers, are driving people towards potentially illegal tax avoidance schemes, according to industry experts.
Umbrella companies typically handle a freelancer's earnings by receiving payments from the hiring company or recruitment agency, deducting tax and national insurance, and then disbursing the income to the worker. While many of these companies operate legitimately, some have facilitated tax avoidance strategies on behalf of workers or for their own gain. In certain cases, funds have been skimmed from workers' wages, and holiday pay has been withheld.
A recent report by PayePass, a specialist in umbrella company compliance, estimates that the number of individuals using unregulated arrangements has grown from 600,000 in 2018-19 to 700,000 in 2021-22. Julia Kermode, CEO of PayePass, stressed the importance of addressing this issue, stating, "[The regulation of the sector] needs to be tackled in the right way, otherwise more and more people will find themselves in these tax avoidance schemes."
The government initiated a consultation in the summer to explore methods of curbing tax avoidance and abuses of employment rights by umbrella companies, and it is currently analyzing the feedback received. The promise to regulate this sector was first made in 2018 in response to a review of modern working practices commissioned by the government, but progress has been sluggish.
The rapid growth in workers using umbrella arrangements can be attributed to changes in off-payroll working rules affecting the private sector since April 2021. These rules shifted the determination of whether contractors are self-employed for tax purposes, known as "outside IR35," from freelancers to their hirers. This change prompted many hirers to require freelance workers to use umbrella companies, leading to a surge in their adoption. However, this surge also attracted rogue operators who facilitated tax avoidance schemes.
Kermode highlighted instances where umbrella workers' earnings were diverted into such schemes, often leading to substantial unexpected tax bills from HM Revenue & Customs. She called this situation "simply unacceptable" and urged the government to step in to protect people's livelihoods, as a significant amount of uncollected tax was likely slipping through HMRC's grasp due to tax avoidance.
HMRC acknowledged the existence of a small number of active avoidance promoters and expressed its determination to drive them out of business. The agency has published information on promoters, directors, and schemes involved in tax avoidance, and it issued stop notices to halt the marketing of tax avoidance schemes.
While the government stated it was reviewing feedback from the consultation and pledged to take action against non-compliant umbrella companies, industry practitioners are calling for faster and more concerted efforts. Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance, noted a concerning proliferation of tax avoidance schemes, describing the situation as reaching "industrial-scale" proportions. He criticized HMRC for not cracking down on these schemes aggressively enough, highlighting the need for enforcement against the architects of these schemes rather than just the victims.
The government's consultation presented various options for regulating the industry, including imposing new due diligence requirements on recruiters or their clients when engaging with umbrella companies, along with penalties for non-compliance. Another option under consideration involves transferring unpaid tax liabilities from an umbrella company to other parties in the labor supply chain.
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