Fix or Fail

The unregulated umbrella industry is heading towards extinction unless calls to end malpractice are heeded says Dave Chaplin, CEO, ContractorCalculator.

During the Third Reading of the Finance Bill in May 2021, we witnessed attempts by Conservative MPs to curb or kill umbrellas through some legislative amendments in conjunction with the Loan Charge APPG. This followed on from the APPG’s revelatory report into the contracting industry titled ‘How Contracting Should Work’, which put the rife malpractice within the umbrella industry under the microscope.

Indeed, conservative MP, David Davis, sent a very clear message to the House of Commons when he said: “If we cannot clean up the wild west, we should eradicate the wild west.”

I believe the industry is currently heading full speed towards self-destruction and, with government proving to be ineffectual yet again, the industry will face an abrupt end unless it quickly and definitively stamps out the malpractice within the next 12 months.

 

Evasion to skim and scam

Malpractice in the sector is of course widely reported. It ranges from blatant tax evasion to aggressive tax avoidance schemes through to other immoral skimming practices. Most notably via the withholding of workers’ holiday pay, as reported in March 2021 by BBC Radio 4’s Moneybox programme.

Within recent memory, the mainstream press has predominantly focused on ‘Mini Umbrella Companies’ that extract £4,000 per worker using the Employment Allowance, which is estimated to cost the Treasury over £1 billion in lost revenues per year.

It is a problem that is only getting bigger. According to a survey by Inni Accounts, the use of umbrella companies has trebled since the Off-Payroll reforms took effect in April 2021. This is at odds with a survey conducted by IR35 Shield in January 2021, where only eight per cent of contractors said they would be happy to use an umbrella.

It is now estimated, therefore, that around 200,000 contractors have been given a Hobson’s choice of using an umbrella or not being offered the work. When dealing with this volume, the amount of money that is either skimmed or scammed registers in the billions.

 

Off-Payroll (IR35) has proliferated malpractice

Many cunning umbrellas also positioned themselves as the answer to Off-Payroll and ignored the fundamental differences of how employment taxes are treated between the old rules (Chapter 8, ITEPA) and the new rules (Chapter 10, ITEPA), leading to unlawful deductions of employment taxes.

While some firms have interpreted the transitions correctly, others have not, and together with the withholding of holiday pay this has created a lucrative space for litigation lawyers to help groups of contractors reclaim money owed to them.

Along with the inevitable land grab by providers, many agencies also saw this as a commercial opportunity and sold spots on Preferred Suppliers Lists (PSLs), with six-figure monies allegedly changing hands. Then there are other ongoing kickbacks for introducing workers. If such deals are not conducted compliantly and transparently, allegations of bribery could soon escalate.

The ironic aspect of all this was spelt out by Sir Iain Duncan Smith during the Finance Bill debate, who said: “The problem is that the worse the level of malpractice, the greater the rewards and kickbacks for the agencies, reducing the revenue for the Treasury.”

Smith isn’t wrong. The road to the bottom of non-compliance is a self-perpetuating cycle where everyone turns a blind eye because they are getting paid millions on the way down through ill-gotten gains. By the time HMRC has eventually caught up with them, the money has disappeared, along with the unscrupulous providers themselves.

 

Proof not promises

This year I fully expect to see thousands of letters being sent by HMRC, not just to contractors but also to agencies, who have been caught up in supply chains involving malpractice. I also believe it is very likely that we’ll see inquiries based on the Criminal Finances Act and Bribery Act. Simply because if the government does not exercise its legislative powers to crack down this time, then this will only serve to encourage the sector more.

There are, of course, calls for regulation which I support, but I don’t think it will happen. Regulation is far from straightforward to set up, takes years to implement and review and is costly. Not to mention the fact that regulation without enforcement is meaningless – in the same way that any industry charter or code is meaningless unless it is properly and regularly audited by a third-party. We need proof, not promises.

The government has a simple alternative – make agencies put workers onto payroll. The longstanding arguments for using umbrellas do not stack up for all workers, and many agencies use them to circumvent regulatory obligations or to generate income as opposed to having a payroll cost.

With government and the taxman both having limited resources, the path of least resistance is obvious.

 

Putting off the inevitable

The industry must step up to avoid the inevitable, and it must do so urgently. One can only hope that is not too late already. It is common knowledge that the market has always been unregulated and poorly policed, and with non-compliance paying so generously, ethical businesses find it hard to compete.

So, why would an industry that pays all the parties handsomely suddenly decide to clean itself up? For what reason? Who is this going to be driven by?

The answer lies with the hirers, who themselves can be held financially responsible for not securing their supply chains. Let’s take one example: if an umbrella decides to override a weak ‘inside IR35’ assessment and pays gross, which it can do in law, then Chapter 10 is in play and it could be argued that the client holds the tax risk. And they wouldn’t even know. This gives these operators carte blanche to play fast and loose, with no financial consequence.

Given regulation and enforcement is either unlikely or years away, the immediate focus needs to be on full transparency for clients combined with third party auditing of the money flows. This is eminently achievable.

 

Do or die

HMRC has played cat-and-mouse games for 20 years and it can no longer afford any more cats – yet it is the mice that are multiplying. We’ve had ITEPA Chapter 7, Chapter 8, Chapter 9, and now Chapter 10 – all sticking plasters designed to stop malpractice.

But if the supply chain cannot clean up its act, my guess is that there won’t be another Chapter added to the Finance Act. Instead, there will be an abrupt cancellation.

 

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