Frances Lewis is Head of Workforce Solutions at Osborne Clarke
Earlier in June, the government issued responses to the November 2021 call for evidence on “umbrella” arrangements in the UK and a consultation on three options for the legislation. The consultation invites responses on regulatory options for umbrella companies. However, it is not clear whether the inquiry includes companies that act as payment intermediaries for payments under the Construction Industry Scheme (CIS) to construction workers. It is often referred to as “CIS umbrella companies”, but these are not the same as the umbrella companies described in the inquiry.
It remains to be seen whether any proposed definition of “umbrella company” will capture CIS umbrella agreements, particularly as most of the inquiry assumes a supply chain involving one or more “labor companies”, rather than a true outsourcing chain of the CEI should not be the Caixa.
The CIS applies to supplies by self-employed construction workers, but there is a risk of HMRC challenge where the supplies are disguised work.
“The position needs to be clarified to ensure CIS umbrella services are considered part of the consultation”
There is also a history of CIS subcontractors claiming rights as workers and agency workers, despite representing themselves as self-employed for tax purposes. We believe that the position needs to be clarified to ensure that CIS umbrella services are considered part of the consultation and to avoid unintended loopholes that could leave CIS umbrella companies outside the definition of “umbrella company” .
Summary of tests related to non-CIS umbrellas
Key Points:
- The role of umbrellas in supporting the trend towards concerted work seems to be recognised. Short-term worker users don’t want to go through the hassle of putting them on a formal payroll. We hope that any new legislation will find a way for people moving from short allocation to short allocation to build, through something like an umbrella, their own pension arrangements and a way to demonstrate the consistency of their income
- The practice of preferred supplier lists is discussed in some cases motivated by the desire of contractors and staffing companies to earn referral fees, as well as the fact that in some cases the umbrellas able to pay the highest kickbacks are those with more aggression tax avoidance schemes. It seems hard to see how the government can say it is not aware of this now.
- There is a clear need for rules that ensure that everyone in the supply chain, including workers, understands what they are being paid for and for what.
- Some of the difficulties of an absolute ban are mentioned. Even if this is considered desirable, it seems impossible to define an umbrella for the purposes of this prohibition in a way that does not capture “innocent” organizations (including government departments) that occasionally support employees of other organizations. We can’t see how a ban would work.
The inquiry raises questions
The consultation, which closes on 29 August 2023, raises many questions but the keys relate to the three options suggested by the government:
- Option 1: Require due diligence. We’re not sure this is the best approach. Our view is that it is better than nothing, but that no control will absolutely eradicate bad practices and we believe that splash umbrellas will continue to work. And there will be a lot of uncertainty for businesses about what constitutes a sufficient check, with the confusion surrounding IR35 checks being one example.
- Option two: Transferring uncollectible tax debt from an umbrella company to another part of the supply chain. We feel that this could work well in combination with the licensing regime mentioned below.
- Third option: consider the employer for tax purposes the labor company that supplies the worker to the end customer. This might work well again, but it doesn’t seem to address the need for gig workers to have a single umbrella under which they can work from gig to gig for the purposes mentioned above. It is also not clear whether this option would involve moving away from the umbrella companies that act as employers and thereby eliminating the employment rights of the umbrella workers.
Commentary by Osborne Clarke
A key question will be whether the government will simply outsource compliance by introducing (in the second option) a regime that makes end-users at the top of the chain liable for non-compliance by umbrella companies further down (as with 2017 and 2021). IR35 regimes) or (in the third option) tax the personnel company that hires workers through an umbrella. Rightly or wrongly, the liability of risk-averse companies tends to influence the market.
And a question for construction companies will be whether “CIS umbrellas” will be considered as part of this inquiry.
