IT contractors using an umbrella company must be proactive -- because the government is choosing not to be

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Now that Free-Work users have had some time to get over the damp squib of the umbrella market update on Tax Administration & Maintenance day, let's take a closer look at what the April 18th statement actually means for contractors in key sectors like IT, who use umbrella companies, writes Shelley Ankers-Wainwright of SAW Consulting.

What is Tax Administration & Maintenance day?

For those unfamiliar, TAM Day is when the government releases details on how they intend to fulfil their previously announced Budget.

The last one of those contractors got was Spring Budget 2024.

Well, back then in March at the chancellor’s report, we were all promised insights into the government's plans for regulating umbrellas -- a much-needed development that has been long-awaited by the many understandably wanting the market to be regulated.

And wanting for a while. Believe it or not, the government committed to regulating umbrella companies as far back as 2018, a staggering six years ago!

Three proposals; now just three paragraphs…

There was a consultation on umbrella regulation which launched in June 2023 (‘Tackling Non-Compliance in the Umbrella Company Market’). But it closed eight months ago, and no response has currently been published.

So, other than the brief ‘stay tuned’ mention at Spring Budget 2024, the TAM Day update was the first we were going to hear from the government since it received industry’s views on how best to regulate umbrellas. These were views based on the government’s own three key proposals.

Unfortunately, on April 18th 2024 when we finally received the update, there was a frantic search for something more than just THREE paragraphs on HMRC’s online page for TAM day announcements.

But there was nothing further, and no additional detail has since been published, meaning we’ve got just three paragraphs and they appear to offer little substance.

The government’s mind on umbrella company regulation still isn’t made up

Essentially, the update from HMRC instructs any contractor who uses an umbrella company, or those like me who offer services to brollies; or brolly partners, or their customers, to continue waiting. So the government’s message is ‘as you were,’ because it still hasn’t made up its mind on umbrella regulation. You must therefore continue waiting patiently – or in my case, impatiently!

Many of us in the umbrella company market, myself included, were hoping for something much more substantial from the government, especially given industry began sending its views to the regulation consultation some 10 months ago.

Though perhaps past experience should have managed our expectations.

Disfunction, and a painful tarnishing

It's clear, though, that action is needed to address non-compliance in the umbrella company market.

The current situation is dysfunctional, benefiting neither contractors nor the reputable umbrellas that strive to do things correctly and comply with HMRC and BEIS rules.

Painfully for these reputable companies, they will continue to be tarnished by their unscrupulous ‘peers.’

Umbrella regulation update 2024: top three takeaways for contractors

But what did the TAM day update on umbrellas actually tell us?

Well, here are the key points from the government update with my decoding for Free-Work users and others who use umbrellas, about what each point probably means in practice:

1) The government is still “concerned about the scale of non-compliance” in the umbrella market and will “publish a response to the consultation in due course.”

Decoded: For contractors and umbrella companies, it means that nothing changes right now

Unfortunately, this ‘we’ll get back to you’-type of response will allow non-compliant umbrellas to continue operating unchecked, potentially harming vulnerable contractors.

This announcement didn't provide the expected clarity or immediate changes which many have hoped and called for.

2) To support contractors, HMRC will publish “new guidance” including an “online pay checking tool.”

Decoded: This looks like an attempt to shift responsibility onto the contractors themselves – with guidance and tool which you – the umbrella employee – will have to take on board and use yourself.

Is it reasonable to expect contractors to perform their own ‘due diligence’ on an umbrella company? I guess many freelancers with IT and other skills already do, and quite rightly.

As for the newly proposed online pay checking tool, if it's anything like CEST (Check Employment Status for Tax, which has been built by HMRC so taxpayers can test IR35 status), there may be doubts about the tool’s effectiveness.

The tool will likewise rely on contractors to us it; use it correctly and be proactive by checking up on their brolly once they’re meant to be contracting via the company for their day-to-day work. It all seems like a bit of an onerous ask on the already hard-working contractor.

3) The government is “minded” to introduce a “due diligence requirement” to drive out “bad actors” from the supply chain.

Decoded: This is the most informative part of the government’s TAM update on umbrella companies.

It suggests that recruiters might vey well be mandated to conduct ‘due diligence.

Interestingly, this move would align with one of the three options proposed in the June 2023-August 2023 consultation.

I do have some concerns with this ‘due diligence’ requirement, however.

Holding non-compliant companies accountable should be a priority, rather than placing undue burdens on other businesses (recruiters in this instance) in the supply chain, who may have limited control over the situation.

There is also the prospect of HMRC penalties for failing to meet the ‘due diligence’ requirements, which will understandably make recruitment businesses nervous.

We don’t know how onerous these requirements could be. The uncertainty about the nature and severity of these requirements, could potentially prompt some recruitment businesses to reconsider their partnerships with umbrella companies ALTOGETHER.

Either way, it seems clear that ‘due diligence’ is the future of umbrella market regulation, with both contractors and recruiters expected to carry it out.

Govt is putting off today what it (or another administration) can instead do tomorrow

Timing is critical, and the need for urgent action is clear – just look at how many avoidance schemes masquerading as umbrella companies which HMRC has to list and warn against, at the rate of a few times every month!

The general election being expected in 2024 adds another layer of uncertainty, possibly leading to further delays in addressing the key issue – that a model many contractors use for work is operating as unregulated. The delay might even shift the responsibility for fixing umbrellas onto a future government.

Final thoughts

In summary, while the TAM day update on umbrellas acknowledges the issues in the contractor market and hints at potential future actions, there's a lack of immediate impact or clarity.

Contractors and compliant umbrella companies must unfortunately continue to face challenges until concrete measures are implemented to address non-compliance.

For contractors, the key ‘must-do’ is to remain extremely vigilant when engaging an umbrella company. Conduct thorough research into the brolly and my recommendation is to only engage with umbrella companies which hold recognised accreditations such as those from the Freelancer & Contractor Services Association, Professional Passport, and SafeRec.

In addition, regularly review your payslips and don't hesitate to raise concerns with your umbrella.

In short, in this challenging compliance landscape, being PROACTIVE is crucial to safeguarding your interests as a contractor because the government is choosing not to be.

Written by

Shelley Ankers-Wainwight

Founder of SAW Consulting

Shelley is the founder of SAW Consulting, a specialist consultancy business supporting umbrella payroll companies to be compliant, efficient and competitive. Shelley has been in the umbrella industry for 16 years, having spent over a decade at Optionis (now Caroola) where she was involved in all major legislative changes and was instrumental in the growth and success of the business. She has held various senior positions in both operations and sales, with her last role being group sales director over both the umbrella and accountancy brands. Shelley has now run her own successful consulting firm for four years, sharing knowledge and best-practice with the industry. She is passionate about helping to improve the reputation of umbrella companies, and uses her experience to help umbrella companies offer the very best when it comes to service and compliance.

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