HM Treasury has begun a consultation to address widespread tax evasion and violations of employment rights by umbrella companies.
There are three primary options presented as a way to tackle the issues currently being flagged. The first alternative would mandate that recruiters or their clients conduct due diligence on umbrella companies, with penalties for noncompliance.
The second option involves enacting legislation that enables HM Revenue & Customs to collect delinquent taxes from other companies in the labour supply chain.
The third alternative, would regard recruiters as the employer for tax purposes and hold them accountable for any payroll irregularities, even if they use an umbrella company to perform these duties.
In addition, the Treasury intends to establish more stringent definitions for umbrella companies to prevent them from evading new regulations by employing alternative methods.
Over 500,000 individuals in the UK are currently employed by umbrella corporations. Some are white-collar contractors who prefer not to operate as sole proprietors, while others are transitory employees referred to umbrellas by recruitment agencies or clients wishing to avoid administrative costs and responsibilities of direct employment.
Legitimate operators in the sector, which lacks significant regulation, have long called for government intervention to combat tax schemes that have resulted in unexpected HMRC invoices for employees. Other violations include umbrella companies swiping wages, denying holiday pay, and offering bribes to recruiters in exchange for placement on a preferred list of suppliers.
Labour unions have demanded that umbrella companies be outlawed entirely, but the Treasury's announcement falls short of this demand. Nevertheless, industry groups applaud the consultation as long overdue.
They note that the proposed plans will require meticulous attention to detail in order to be implemented successfully, and that their success is contingent upon the government's commitment of additional resources to enforce new and extant labour market regulations.