IR35: MPs urge government to protect contract workers from the malpractices of umbrella companies

Urgent steps are needed to clean up UK's 'wild west' contracting labour supply chain after IR35, a new investigation says

A parliamentary inquiry into UK's contracting sector has exposed various malpractices in the supply chain by many non-compliant umbrella companies and recruitment agencies.

The Loan Charge All-Party Parliamentary Group (APPG) released the findings of a new investigation this month, examining in detail how freelance workers and contractors should be "remunerated and taxed fairly and appropriately" for the work they do through umbrella companies.

The investigation also reviewed various measures that the government could take to prevent tax avoidance schemes being promoted in the contracting sector. The inquiry, which started in December 2020, received written submissions and also included an oral evidence session on 15th December.

The review comes after new IR35 rules came into force on 6th April, making medium and large-sized private and public sector organisations responsible for assessing the employment status of contractors that are paid via a personal service company (PSC), such as a limited company set up by the contractors themselves, for tax purposes. Previously, contractors were allowed to self-declare their tax liabilities. The change has led to an increased demand on the part of employers for umbrella PAYE schemes, under which all of a contractor's revenue is taxed as though they are a regular employee. However, these schemes have been accused of shady practices.

The Loan Charge APPG said in its report that the government must introduce statutory regulation as earliest as possible "to clean up the supply chain, the 'wild west'," where many of the issues associated with [disguised remuneration] schemes have been occurring.

The investigation found that the employment agencies are demanding 'kickback payments' from umbrella firms in exchange for being recommended to clients or added to a preferred supplier list. The incentives sometimes include paid-for luxury holidays or fitted kitchens for recruitment agency directors.

In many cases, freelance and contract workers, including many in the IT sector, are given no choice as to which umbrella company they should choose, meaning that the worker faces 'take it or leave it' situation. The problem is particularly serious in sectors where recruitment agencies are the only source of work.

A recruitment agency may charge the umbrella company a fee for introducing a contractor to them or seek compensation through timesheet rebates, a submission from Phil Pluck, CEO of the Freelancer and Contractor Services Association (FCSA) claimed.

The FCSA offers accreditation to compliant umbrella firms that agree to follow its "codes of compliance". The FCSA currently has 65 members, and its estimates suggest that there could be around 900 umbrella companies that are not accredited by FCSA but are operating within the labour supply chain.

"A fee of £30,000 is not uncommon… [or the] agency receives a payment for every timesheet processed (typically £10) in addition to whatever margins they make elsewhere," the report stated.

According to the FCSA, non-compliant umbrellas save costs by "failing to take on employment costs, failing to pay holiday pay, taxes, NI, pension contributions, apprenticeship levy, etc."

"This gives them a huge profit margin which allows them to fuel the incentive schemes within the industry."

The inquiry also discovered that some umbrella companies are unlawfully deducting employer's taxes from worker's pay.

The 97-page report calls on the government to strengthen and enforce the existing regulation, making it illegal for businesses to offer a position that is conditional on using a specific umbrella firm or payment intermediary.

"The law should be changed to make agencies/umbrella companies/payment intermediaries and their directors liable for taxes later deemed to have been avoided or not paid if a scheme is designated a tax avoidance scheme," the report suggests.

The Loan Charge APPG is also urging all contract and freelance workers who have experienced malpractices of umbrella firms or recruitment agencies to report it to their own MP.