Is Change Possible?
Crawford Temple, CEO and founder of Professional Passport, views the challenges of making the umbrella sector compliant.
Despite passionate and well-presented speeches by David Davis MP and Iain Duncan-Smith MP recently to introduce amendments to the Finance Bill that would serve to clamp down on non-compliance and malpractice in the umbrella sector the amendments did not make it to the voting stage. It was disappointing. Over recent weeks there has been a growing number of revelations on non-compliance within our industry with calls to regulate what some refer to as the ‘wild west’. But who makes up the wild west? Are they umbrella companies or are they payment intermediaries or something else masquerading as an umbrella or payment intermediary? The definition needs closer examination.
If the umbrella sector were to become regulated first there has to be an agreed definition of an umbrella company. What we should have learned over the preceding years is that where a rigid definition is determined and agreed, the market is very adept at side stepping the definition to ensure they fall outside the scope of that defined term.
Looking specifically at this point we might consider a broader definition that would be harder to sidestep, that of payment intermediary. A payment intermediary is a company that interposes itself between the recruitment company, or end client for direct engagements, and a contractor. This definition covers almost all the arrangements we have seen featured as non-compliant without fixating specifically a label such as an umbrella company. Creating the widest possible definition must be the starting point to achieving wide reaching enforcement and a more level playing field.
Enforcement is key
The next critical consideration is enforcement. In every case highlighted over many years the legislation or regulation already exists and has a body, or bodies, responsible for enforcing it. HMRC and Employment Agency Standards Inspectorate (EASI) have powers to legislate, regulate and enforce which begs the question – why is the non-compliance so widespread?
Enforcement is expensive but without effective enforcement there is little incentive to play by the rules. In fact, I would argue that the lack of enforcement has created the opposite effect and has provided the incentive for non-compliant providers to flourish. Where this lack of enforcement is coupled with a series of ongoing rule changes the incentive becomes even greater.
The first example I would cite is the Payday-by-Payday model which has seen HMRC issue many warnings about its non-compliance. The model became quite prevalent in the market and yet not one case was brought by HMRC. In fact, the rules were changed that effectively closed down the model and those that had ignored the rules escaped without any consequences; they simply stopped the offering. An even more serious example is the loan charge. HMRC retrospectively changed the legislation to allow a greater reach of enforcement. However, rather than pursue the promoters of these arrangements, HMRC pursued the individuals and the promoters once again got away scot free and, what’s more, were allowed to keep all the money they had made from innocent victims. These offerings are still prevalent in the market today, with many blatantly promoting themselves as a tax avoiding option. With so many workers facing cliff edge income drops as a result of the off-payroll rules over the last few years, the market conditions have been perfect for these providers. They know HMRC will pursue the individuals and they will get to keep the money.
Such an approach does nothing to stop these promoters, and arguably serves to incentivise more to enter the market, which is what is happening. What makes this even worse is, as I have said on numerous occasions, HMRC has all the data to identify these arrangements and shut them down quickly but is not taking the proactive approach that is needed.
Then it has been suggested that the furlough arrangements specifically relating to holiday pay have been incorrectly applied. Once again, I say there are regulations already in place enforced by HMRC, so why do we need another regulator and how would this change anything?
We also have the issues of ‘skimming’. There are regulations already in place that can be used against any provider that is skimming monies by knowingly miscalculating incomes or taxes. Once again, the issue is enforcement, or lack of it.
The only exception is possibly the retention of holiday pay, or as it is more often described ‘nicking’ holiday pay. This is possibly the hardest one as where it is stipulated within the contract and clearly stated it is not therefore illegal, although it is unequivocally morally unjustifiable.
With the exception of the holiday pay issue, I fail to see how creating another ‘regulator’ changes anything. It is not about regulation; it is all about enforcement. If current regulators are not being resourced sufficiently to apply the enforcement required how does extending the reach of an already over stretched body, The Employment Agency Standards Inspectorate [EASI], change anything. This was the government’s response to the wide-ranging issues in the sector and proposed amendments to The Finance Bill.
So, if the regulations are already there and it is an issue of enforcement surely the answer should lie in reducing the number of companies that are needing individual regulation and enforcement.
Lessons to learn from financial services
Having spent a major part of my career in financial services and growing up through the introduction and development of the regulation of the insurance sector I believe there are lessons that can be applied to the recruitment and payment intermediary sectors.
In years gone by, regulators in financial services quickly realised that individual enforcement across thousands of small companies, typically independent financial advisers, was almost impossible. The result was the creation of compliance networks. These networks took on the responsibility of compliance for their members and provided a central point for regulation. Visiting one compliance network effectively regulated hundreds of members. The large companies could register direct and be directly regulated. This dramatically reduced the numbers of companies that required direct enforcement.
If the same logic was applied to both the recruitment and payment intermediary sectors, I believe enforcement could and would become far more effective and EASI would stand a much better chance of having a real impact.
There are already many organisations within both sectors that would be able to take on this role.
We will be issuing our detailed paper on these suggestions in the next few days which also addresses other aspects of the tax framework that we believe need to be tackled to remove incentives for dubious practices.