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.