The Government has published a consultation titled "Tackling Non-Compliance in the Umbrella Company Market" on 6 June 2023. The purpose of this consultation is to gather opinions on addressing non-compliance issues related to tax and employment rights in the umbrella company sector. The consultation period will remain open until 29 August 2023.
The Government has identified three objectives for the umbrella market:
1. Deliver improved outcomes for workers.
2. Support a level playing field.
3. Protect taxpayers from revenue losses resulting from non-compliance.
The Government acknowledges that an outright ban on umbrella companies would not be a proportionate response. Instead, they propose implementing regulations to address the issues. To do so, they first need to legally define umbrella companies, and the consultation provides two options for this purpose.
According to the consultation, an umbrella company is described as a business that employs individuals on behalf of an employment business, who are then supplied to end clients.
To tackle non-compliance, the consultation suggests several options:
1. Introduce a mandatory due diligence requirement. Penalties would be imposed on employment businesses or end clients that fail to comply.
2. Grant HMRC (Her Majesty's Revenue and Customs) legislative power to collect umbrella company tax debts from other businesses in the supply chain, such as Income Tax and National Insurance Contributions (NICs). Alternatively, another entity in the supply chain could be designated as the "deemed employer." The aim is to hold employment businesses and end users accountable for unpaid tax debts, encouraging them to be more selective in engaging with umbrella companies.
3. Explore the possibility of preventing umbrella companies from handling gross funds. Instead, a party above the umbrella company would deduct Income Tax and NICs and pay them directly to HMRC. This measure would prevent umbrella companies from treating worker payments as non-taxable, such as through "loan" avoidance arrangements.
The Government is also seeking views on combating reported abuse of the Employment Allowance (EA) and the VAT Flat Rate Scheme. One option proposed is to mandate the presence of a UK director for a company to be eligible for the EA. This measure aims to address concerns about misuse and ensure that only eligible companies benefit from the allowance.
The consultation provides an opportunity for stakeholders and interested parties to contribute their opinions and suggestions on these matters.
Regulating umbrella companies has been on Government’s “to do list” since forming part of the Good Work Plan in 2018 which resulted in an initial Call for Evidence in November 2021 and so, it is long overdue that the next steps are taking place
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