A perfect storm
FCSA chief executive Phil Pluck looks at how the dynamics of the coronavirus pandemic, IR35 reforms in the private sector and the lack of regulation is fuelling a surge in unlawful activities.
Even before the coronavirus pandemic hit the UK, there were already two market dynamics in the economy. Firstly, the number of contingent workers grew at a phenomenal rate and showed no signs of slowing down.
For years now, businesses have been looking at ways to become more agile and reduce their financial risk. Traditionally, companies with employee numbers of around 6,000 would have engaged them on fixed contracts. However, in today’s world, it is more likely that only 2,000 of those would be full time, fixed contract employees, with a larger proportion being outsourced workers. Secondly, and perhaps something we may have now forgotten, is that before the pandemic, it was predicted that the UK was heading towards an economic dip in any event. So again, businesses were already starting to look at how they could reduce their financial risk.
But then, in March 2020, Covid-19 changed this dynamic entirely and, in many respects, dramatically accelerated the demand for contingent workers across all sectors and all skill levels. Businesses were now looking harder and faster at how they could reduce their capital costs for them to be profitable or even survive and to provide them with the flexibility to meet the demands of the fast-changing and uncertain market conditions.
So what are businesses doing now? They are now scrutinising their fixed-cost base, and these generally include premises and people. As far as premises are concerned, there has been a marked cultural change during the pandemic. More and more businesses are now open to the idea of employees working from home, where practical.
When it comes to people, employers now have a microscopic eye on who needs to be a full-time employee and who can flex in and out of their business as an outsourced worker. Unfortunately, some employers have had to make the difficult decision to make people redundant, which has resulted in some of those made unemployed transitioning from traditional employment to outsourced working for the first time.
Covid-19 has dramatically accelerated the number of contractors and freelancers in the UK workforce. As the number of contingent workers increases in response to these market dynamics, we have also seen a marked increase and the number of umbrella companies entering the marketplace.
Five years ago, there were in the region of 400 umbrella companies in the UK market. Now we’re looking at circa 800 to 900 umbrella companies. Whilst the increase in numbers are surprising in itself, there is an even bigger issue emerging for our sector and one that the government is now beginning to respond to.
For years now, this has been a sector that has had to live with unlawful players moving into the marketplace, putting companies within the supply chain at commercial risk and at the expense of exploiting contractors. Many of the contractors now entering the market for the first time are not aware of the risks posed by these unlawful players and the incredibly creative scams that they promote. So what we have here is a situation where we have lots of new people who will not be educated on the contractor world moving in and we have several players in the market offering the likes of ‘QC-approved loan schemes’, ‘HMRC-registered trust schemes’ and scams involving failure to provide holiday pay or give false or improper pay estimate on their websites.
But the perfect storm doesn’t end there as there is another dynamic that is now coming into play, and that is the IR35 reforms in the private sector which is due to come into effect on 6 April 2021.
What IR35 is doing is accelerating the number of contractors moving into umbrella employment at an even faster pace. Contractors who for many years have operated through PSCs are now being caught ‘inside IR35′ and being forced to ditch their limited companies and become an umbrella employee.
First of all, it’s important to remember that they don’t have to do that as they may choose to retain their limited company and also be an umbrella employee. However, these workers are still new to the ‘world of umbrella’ and therefore susceptible to these unlawful players and the tempting offers they promote.
There are two types of umbrella companies emerging in response to the increase in contingent workers of concern to the FCSA. The first is pure accountancy firms. They can see that their PSC client base is slowly but surely diminishing due to IR35 and are therefore diversifying into umbrella. It’s important to understand that many of these are, in fact, compliant and well-meaning. However, the question you have to ask is, do they fully understand the level of compliance required to operate as an ethical and compliant umbrella employer?
Unfortunately, from the evidence we’re seeing at the FCSA, it would suggest that they are not. We know this because we see an increase is the number of new membership applications from companies like this who are looking for umbrella accreditation. We have to turn away such applicants because, in line with changes in market conditions, we’ve since raised our standards and now insist on all new umbrella applicants having to demonstrate that they are an established company and have not been set up in reaction to IR35.
But there is another type of player moving into the marketplace – umbrella companies who have an outright intention to be unlawful. They see the IR35 reforms as another opportunity to take advantage of contractors who may be tempted to take-up lucrative take-home pay offers.
So why are we in a perfect storm? We are in the perfect storm because all of this is happening with no regulation in place. We now have a supply chain that is exposed and has liabilities running through it and new contractors entering the marketplace ill-informed and at risk of being exploited.
In the absence of regulation and following the recent announcement of Matthew Taylor’s departure, it would suggest that the government may be going cold on regulation. The need for increased due diligence across the supply chain is more significant than ever before.
IR35 reforms will see more end clients looking more closely at its supply chain in order to mitigate their risk. Agencies will, therefore, need to be able to demonstrate to their end clients that the umbrella companies on the PSL are fully compliant and transparent. With the perfect storm described and the sophistication of some of these unlawful players, that is not as easy as it sounds.
One such way to identify low-risk service providers is to check for accreditation from a recognised industry body, such as the FCSA, and of course, to be members of reputable bodies such as REC, TEAM and APSCo. FCSA accreditation shows that a service provider has demonstrated that it operates according to the highest industry compliance standards.
We have responded to these market dynamics by raising our standards for new membership applicants. Anyone applying to become a member of FCSA will undergo a detailed fit and proper persons and liquidity checks and determine, as mentioned earlier, that they are an established firm before we allow then to proceed to the accreditation process.
Then, there is our unrivalled independence, detail, and rigour of our audit process that ensures only those intermediaries who can demonstrate the highest compliance standards can be awarded accreditation. It’s difficult to become an FCSA member, but it’s difficult for a reason – to protect the integrity of the supply chain and its stakeholders.
The need for FCSA is greater today than it ever has been. While we continue to be that voice of compliance and engage with government bodies to address these pressing issues, together with our members, we are here to support you whilst we are going through this perfect storm.