UK.gov finally proposes to police rogue umbrella companies but leaves questions unanswered

At the eleventh hour, UK government has detailed plans to regulate umbrella companies, some of which stand accused of dodgy dealings as their use grows among IT contractors after IR35 tax rule changes. Following an earlier announcement of a Single Enforcement Body to tackle modern slavery, enforce the minimum wage, and protect …

[Ken Moorhouse]

James Smith & Sons (est 1830)

...are no doubt pondering what shower of a government brought this in.

[Anonymous Coward]

This is not necessary. The problem is one of Governments making. Contractors were unfairly victim of a change in tax regime such that they were forced to use umbrella companies. The situation was simple: contractors earned substantially more than employees doing the same job but whereas an employee got paid holidays, sick pay, training, job security, possibly very good pension. Those costs fell on the contractor, the change left them worse off than employees.

Reality is that many contractors are only needed for relatively short time to deploy their specialist expertise on a project. That expertise (especially in a fast moving field like IT) calls for a lot of cost, time and effort to keep up to date, more than many employers want to spend on an individual who might at any moment take their newly acquired skills to a better employer. The individuals expertise is no longer needed by the employer who then has dead-wood on their hands. What to do with that worker? Retrain in a completely different skill? Make redundant? And how does the employee feel about those options? Discard their hard earned expertise, possibly years of varied experiences developing an in-depth knowledge of their subject or go look for another job? And over 50, nobody believes that age-discrimination is not still widespread.

Their expertise is not always in high demand so a contractor may find himself unemployed for several months a year and needs a financial buffer to see him over the quiet periods, doubly so as that time and money will likely be spent on updating knowledge and skills.

From the blinkered perspective of HMRC those guys were not paying "their fair share" of income tax and NI while working while disregarding all the other factors. Another motivation was to force contractors to become employees to the benefit of government and large employers (IT depts in particular).

In practise those employers found many contractors quit their current task at the earliest opportunity causing immense damage to the UK economy. Some now need to outsource the whole project or suffer significant disruption from having to replace contractors frequently involving much effort on recruitment and initial drop in productivity as the new incumbent familiarises himself with the organisation and the task.

The initial HMRC aim (in about 1999) was that this should raise about £300m more Tax/NI, the evasive answers as to whether this was achieved suggest it was not.

There are other fields of employment where the situation is different, consider for example the building trades. An good electrician or plumber can operate as a one-person limited company just as IT contractors did in the past because his need for continual professional development is less and contract durations may be for a few days or weeks. If they have regular work for let's say, a building company, at the point that they risk falling foul or IR35, it's relatively easy to switch to a different building company. The skill set is relatively standard and from an employer perspective the change of individual worker is relatively simple, quick and inexpensive.

[notyetanotherid]

You are right that this was a problem of the government's own making. It seems to be the normal way of government in the UK:

1. Media publicises an issue

2. Knee-jerk political reaction to increased media coverage

3. Rushed sticking-plaster legislation

4. Unintended consequence

5. Rinse and repeat

IR35 was a massively unwieldy sledgehammer to crack a nut. A nut nevertheless; when I was a contractor in the 90s most associates paid themselves a pittance of a salary and took all their income as dividend to avoid paying National Insurance contributions. When IR35 was announced, that nut was already about to shrink considerably because the national minimum wage came in in 1999; assuming enforcement was planned it would have been harder to pay yourself ~£60 a week while billing the client for 35 hours. Why successive governments have remained wedded to IR35 is a mystery to me. There must be simpler solution, for example a punitive tax on dividends which exceed a threshold based on the salary bill of the company?

But likewise there appears to be a nut now: e.g. MUC scams utilising the £4000 Employment Allowance. Imagine you are a contract services company and you win a contract to supply 1000 short-term staff for, let's say, a 'track and trace' system, if you set up 100 unrelated mini umbrella companies with a Filipino sole director, employing 10 staff each, claim the Employment Allowance for each company, then you have basically made a cool additional profit of £400K (minus expenses) on the contract at the expense of the taxpayer, and as a bonus your 'employees' have no comeback against you (or indeed anyone) if they don't get paid, etc. I suspect that this revenue loss to HMRC is the issue that is prompting the latest knee-jerk...

[Ken Moorhouse]

Re: a punitive tax on dividends

Covid handed gov the perfect opportunity. Making Limited companies ineligible for SEISS grants.

[elsergiovolador]

You don't have to use an umbrella

There is a lot of misinformation about that if you are a contractor working inside IR35 then you must use an umbrella.

You can continue to work with your own company, but instead you need to have a so called Fee Payer that collects the tax before the deemed salary comes to your company.

Some umbrella companies offer that service.