Nick Dancer, Head of Policy & Public Affairs, FCSA, on why it’s time for Government to partner with industry.
In last week’s Spring Statement, the government reaffirmed its commitment to tackling non-compliance in the labour market, with additional enforcement resources for HMRC and fresh consultations on payroll fraud and tax avoidance. At FCSA, we strongly support greater enforcement and the resources to make that a reality – compliant businesses should not be undercut by payroll pirates who exploit loopholes and workers alike.
However, given what happened with the 2023 consultation on tackling non-compliance it’s hard not to be a bit sceptical about yet another consultation. That response came two years later, from a different department, after a policy announcement had already been made! Much like the ‘tax gap’ numbers, the retrofitted response is a classic example of ‘policy-based evidence making’.
We’ve seen this before – well-intended proposals that fail to translate into workable, evidence-based policy. If the government is serious about stamping out non-compliance, it must listen to the compliant parts of the sector and ensure that any new regulations – including those related to tax – undergo a full Impact Assessment. Failing to do so risks creating unintended consequences that disrupt the labour supply chain, without solving the core problem.
A New ‘Option 4’ for Umbrella Regulation
The upcoming Employment Rights Bill (ERB) presents the government with a golden opportunity to introduce a new, more effective way of closing the tax gap – the Government already plan to regulate brollies for employment rights, why not go the whole hog? Instead of pushing ahead with the flawed plan to shift PAYE liability to recruiters, the government should mandate a licensing scheme for umbrella companies, combined with joint and several liability for tax debt.
This would not be a U-turn, as this option was not previously available – it combines the best of the ideas consulted on, as well as new ideas following extensive research. It represents a practical alternative that meets the government’s own objectives, while ensuring fairness in the labour market. Personally, I think it’s great when a Government makes its policies more effective through stakeholder engagement – governments are generally commended for this.
Crucially, our recent FCSA report on umbrella regulation outlines a path for the government to partner with industry – a manifesto commitment yet to be fulfilled. By working with experts in the sector, HMRC and policymakers can implement reforms that are both effective and enforceable.
Stopping Phoenixism with Proper Oversight
An issue plaguing the umbrella sector is Phoenixism, where bad actors shut down one company, only to restart under a different name. This cycle allows fraudulent operators to repeatedly evade tax liabilities and exploit workers. FCSA have been reporting said firms for years – we want to help Government end this game of Whack-A-Mole once and for all.
A formal licensing and registration scheme would put a stop to this. Other industries – including accountancy and law – have robust regulatory frameworks that prevent Phoenixism. With the ICAEW for instance, moving/setting up new firms does not remove your disciplinary records. The umbrella sector should be no different. If the government is serious about cracking down on tax avoidance, this is the kind of structural reform that’s needed – and it’s tried and tested.
A Data Driven Approach for Compliance and Enforcement
I don’t think it is unfair to say that Government have not been the best at making use of the information they already hold, or that could be made available to them. We warmly welcome the HMRC consultation that seeks to address this. I would encourage HMRC to closely involve officials in the Department for Science Innovation and Technology (DSIT) – a whole government approach is needed, and they lead in this area. HMRC should also seek the insights of the government’s ‘Smart Data Council’.
FCSA have shared ideas on how existing data can be better used for enforcement purposes in our consultation responses for the 2025/26 Labour Market Enforcement Strategy. Better use of data will enable enforcement activities to be better targeted and systematic. Current practices are too geared towards picking low hanging fruit, and huge audits of largely compliant firms – a big waste of everyone’s time, especially if accreditors are already doing it.
Making Tax Digital: Faster, Smarter, Fairer
We also support the government’s Making Tax Digital (MTD) initiative, but the current approach is too slow and too limited – but we accept they need to start somewhere. The Construction Industry Scheme (CIS) that operates in our sector already allows for real-time tax deductions – why can’t similar systems be rolled out for self-employed workers more broadly?
A real-time tax payment system would:
- Reduce late payments and unexpected tax bills for the self-employed.
- Cut down on unnecessary phone calls and paperwork for HMRC.
- Make compliance easier for businesses by integrating tax payments into their existing processes.
- Stabilise the Government’s stream of income – instead of all receipts landing in January.
The technology exists, it’s time for HMRC to adopt it.
In summary
The Government has a choice; storming ahead with a “we know best” approach isn’t the way. We really hope the four consultations announced will be meaningful. Let’s get this right.
With the ERB on the horizon, the government has a unique opportunity to fix umbrella company regulation properly. There is still time to do that in the House of Lords. We would like to see:
- A licensing scheme with joint and several liability for tax debt – to stop rogue operators.
- A commitment to partnering with industry – as promised in the government’s manifesto.
- A serious crackdown on Phoenixism – bringing umbrellas in line with other regulated sectors.
- A data driven enforcement approach – extracting the greatest value from scarce government resources.
- Accelerating Making Tax Digital – so compliance is easier for workers and businesses alike.
If the government is willing to listen to industry and take a smarter approach – making use of knowledge and expertise – then real reform is within reach. Now is the time to get it right.
