Tuesday, February 18 2025

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NEWS

NEWS

Embracing Regulatory Reform for a Fairer Umbrella Company Sector

The UK government’s recent consultation to address tax non-compliance within the umbrella company sector marks a pivotal moment for all of us in the industry. At Umbrella Check, we’ve closely followed the developments, recognising the critical need for reform that not only tackles non-compliance but also upholds the rights of workers and ensures a level playing field for businesses. The consultation’s focus on mandating due diligence resonates deeply with our ethos and operational model, highlighting a path forward that we believe is not only necessary but achievable.

The Imperative for Change

The challenges of tax non-compliance and unfair practices within our sector are not new. However, the government’s consultation brings these issues to the forefront, demanding urgent action. The impact of non-compliance ripples through the entire supply chain, affecting workers’ livelihoods, distorting competition, and eroding public trust. It’s clear that a change is needed—a change that aligns with the principles of fairness, transparency, and accountability that Umbrella Check has championed from the start.

Summary of Options 

In our opinion, the first proposal to mandate due diligence is a step in the right direction. It’s a strategy that promises to directly address the root causes of non-compliance, ensuring that all umbrella companies operate within the bounds of the law and respect the rights of their employees. This approach is not just about enforcing rules, it’s about creating and maintaining a culture of compliance and integrity across the sector

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Mandatory due diligence aligns with existing industry best practices, promoting transparency and accountability without introducing new liabilities or operational complexities. It builds on the principle that prevention is better than cure, focusing on ensuring compliance from the outset. 

Unlike the other options, mandatory due diligence can be scaled to fit the size and capacity of the business, ensuring that smaller umbrella companies are not disproportionately affected. It offers a level playing field, where compliance is the norm, and all parties are encouraged to uphold high standards. 

Finally, by focusing on due diligence, the industry can better protect workers’ rights, ensure compliant businesses are not unfairly penalised, and maintain operational stability. This approach avoids the potential pitfalls of transferring tax debts or redefining employment relationships, which could lead to unintended consequences for compliance, market dynamics, and worker protection.

The second option proposes the transfer of tax debt from non-compliant umbrella companies to other entities within the supply chain, such as recruitment agencies or end clients, should the umbrella company fail to meet its tax obligations.

Introducing the possibility of transferring tax debt to other parties in the supply chain could lead to significant operational disruptions. Compliant businesses, especially those with limited oversight over their entire supply chain, could face unjust liabilities, penalising them for non-compliance they had little control over.

The risk of inheriting tax debt from non-compliant umbrella companies could unfairly penalise businesses, particularly those that have engaged in due diligence but are still exposed due to the actions of others. This could lead to the effect, where businesses are wary of engaging with umbrella companies, potentially stifling industry growth.

Under the third proposal, the employment business that supplies workers to the end client would be deemed the employer for tax purposes, centralising tax compliance and PAYE responsibilities. With this option, redefining the employer for tax purposes necessitates significant changes to payroll and tax processing systems, posing a considerable challenge, especially for smaller businesses with limited resources.

Additionally, this shift could create confusion over who is responsible for various employer obligations, including employment rights and benefits. The ambiguity could lead to compliance risks and undermine worker protections.

Finally, by complicating the employment relationship, there’s a risk that businesses may seek to avoid these new responsibilities, potentially leading to a decrease in the use of umbrella companies and an increase in less secure employment arrangements for workers.

In our opinion, while Options 2 and 3 present potential mechanisms for addressing tax non-compliance, the challenges and risks they introduce make them less favorable compared to mandatory due diligence. At Umbrella Check, we’ve long championed rigorous due diligence as the foundation of ethical business practices. Our model, built around thorough checks and continuous monitoring, exemplifies how due diligence can be implemented effectively and sustainably.  

Inclusivity, Cost-Effectiveness, and Simplicity

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.

What We Hope to Achieve

Umbrella Check envisions a future where compliance is the norm, not the exception. By advocating for mandatory due diligence, we aim to lead the industry toward greater transparency, fairness, and respect for worker rights. We believe that with the right framework in place, supported by the collective effort of all stakeholders, we can achieve a truly compliant and competitive sector.

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Umbrella Check
Umbrella Checkhttps://www.umbrellacheck.org.uk/
Umbrella Check empowers recruitment agencies to take complete control over compliance, enabling them to proactively spot and address bad actors in their supply chain.

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