The government launched a consultation back in December on the role of umbrella companies, following concerns that many of these firms are failing to comply with employment and tax laws. Before launching the consultation, the government said it was ‘aware of concerns’ around the fact that some intermediary firms were breaking employment laws or avoiding paying tax.
It’s been a long-held view of many in the industry that umbrella companies are taking money from contractors and breaching employment law. The consultation will investigate areas such as failing to provide employee rights; for example sick pay & holiday pay and the skimming of contractor pay. The consultation will also look at allegations of the use of tax avoidance schemes.
The overall aim of the consultation is to encourage a dynamic and flexible labour market andnew ways of working. However, it wants to ensure that workers using these flexible ways of working are protected from exploitation.
The use of umbrella companies has grown substantially in the last 20 years but remains a largely unregulated sector. It’s now estimated that over 600,000 individuals work via these types of companies. Since the introduction of new IR35 rules, many contractors are now told they must work via an umbrella firm, leaving contractors more open to such abuse.
The consultation closes on 22 February 2022 and the government is urging employment business / individuals & workers and umbrella companies to respond and provide feedback to the consultation. If you wish to take part, then this feedback can be submitted via the gov.uk website here.
What is an umbrella company?
Umbrella companies play a role in the labour market by facilitating theengagement of temporary workers and contractors. Umbrella companies act as a ‘middle man‘employing people on behalf of clients and employment businesses. They don’t source work for contractors as this is usually done by an employment business.
Workers are employed by the umbrella company, but the individual doesn’t provide services to the umbrella company itself. The individuals provide their labour to clients, typically on a short-term basis.
Umbrella companies responsibilities include:
- paying salary.
- deducting tax.
- National Insurance contributions (NICs).
- managing employment rights such as holidaypay, statutory sick pay and workplace pension auto-enrolment.
If a contractor or worker is engaged under contracts of employment via an umbrella company, they should be entitled to benefit from full employment rights (subject to qualifyingconditionssuch as length of service).As an employee they should also receive any payments of earnings from their employment after deductions, such as income tax and NI.
It’s hope by many in the industry that the consultation will bring umbrella companies more in line with employment law and stop some of these non-compliant practices.
The fact the government has now formerly launched this consultation into umbrella market workers has been generally welcomed by the contracting community, who view it as sign that statutory regulation for umbrella companies will be created soon to protect contractors. It is hoped that any regulation will be good news for compliant umbrella companies, who can find their reputations tarnished by the bad companies who engage in malpractice.
If you’re a contractor working under an umbrella company and need some further help and advice around employment, employment taxes or umbrella companies, then speak to our contracting and tax experts today by calling 03330 886686 or you can also e-mail us firstname.lastname@example.org.
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