Frances Lewis is head of workforce solutions at Osborne Clarke
At the start of June the government issued responses to the November 2021 call for evidence about “umbrella” arrangements in the UK and a consultation on three options for legislation. The consultation invites responses on the options for regulating umbrella companies. However, it’s not clear whether the consultation includes companies that act as payment intermediaries for payments under the Construction Industry Scheme (CIS) to construction workers. These are often referred to as “CIS umbrella companies” but they are not the same as the umbrella companies described in the consultation.
It remains to be seen whether any proposed definition of “umbrella company” will capture CIS umbrella arrangements, especially since most of the consultation assumes a supply chain involving one or more “employment businesses”, which in a true CIS subcontract chain should not be the case.
The CIS applies to supplies of self-employed construction workers, but there’s a risk of HMRC challenge where supplies are disguised employment.
“The position needs to be clarified to ensure that CIS umbrella services are considered as part of the consultation”
There’s also a history of CIS subcontractors claiming rights as workers and agency workers, notwithstanding the fact that they’ve represented themselves as self-employed for tax purposes. We think the position needs to be clarified to ensure that CIS umbrella services are considered as part of the consultation and to avoid unintended loopholes which might result in CIS umbrella companies falling outside the definition of “umbrella company”.
Summary of evidence relating to non-CIS umbrellas
Key points:
The role of umbrellas in supporting the trend towards gig working seems to be acknowledged. Users of short-term workers do not want to go through the rigmarole of putting them on a formal payroll. Let’s hope any new legislation finds a way for individuals who move from short assignment to short assignment to build, via something like an umbrella, their own pension arrangements and a way of demonstrating the consistency of their income.The practice of preferred supplier lists in some cases being driven by the wish of hirers and staffing companies to get referral fees is commented on, as is the fact that in some cases the umbrellas able to pay the highest kickbacks are the ones with the most aggressive tax avoidance schemes. It seems hard to see how the government can say it is not now on notice of this.There is a clear need for rules which make all in the supply chain including workers understand what they are being paid and for what.Some of the difficulties of an outright ban are mentioned. Even if this is considered desirable, it seems impossible to define an umbrella for the purposes of such a ban in a way that does not capture “innocent” organisations (including government departments) which occasionally second employees to other organisations. We cannot see how a ban would work.
Consultation raises questions
The consultation, which closes on 29 August 2023, raises many questions but the key ones relate to the three options suggested by the government:
Option one: mandating due diligence. We are not sure this is the best approach. Our view is that it is a better than nothing but that no checks will absolutely eradicate bad practice and we think dodgy umbrellas will continue to operate. And there will be a lot of uncertainties for business about what does constitute a sufficient check, with the confusion relating to IR35 checks being an example of this.Option two: transfer of tax debt that cannot be collected from an umbrella company to another party in the supply chain. We consider this could work well combined with the licensing regime mentioned below.Option three: deeming the employment business that supplies the worker to the end client to be the employer for tax purposes. This could again work well but does not seem to address the need for gig workers to have a single umbrella they can work with from gig to gig for the purposes mentioned above. It’s also unclear whether this option would involve a move away from umbrella companies acting as the employer and, with it, the removal of umbrella worker employment rights.
Osborne Clarke comment
A key question will be whether the government will merely outsource compliance by introducing (in option two) a regime that makes end users at the top of the chain liable for non-compliance of umbrella companies further down the chain (as with the 2017 and 2021 IR35 regimes) or (in option three) making the staffing company that engages workers via an umbrella liable for tax. Rightly or wrongly, making risk-averse corporates liable tends to influence the market.
And a question for construction companies will be whether “CIS umbrellas” will be considered as part of this consultation at all.
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