Government must take action to clean up the ‘wild west’ supply chain that exploits freelance and contract workers and encourages tax avoidance schemes, say MPs
The Loan Charge APPG, which represents a group of cross-party MPs, has published a report on the inquiry into How Contracting Should Work, which has exposed significant non-compliance and malpractice in the supply chain by many umbrella companies and recruitment agencies. Some of this has driven the operation and mis-selling of tax avoidance schemes, which has caused the supply chain to be dubbed a ‘wild west’ by many professionals.
The report stated that ‘IR35/off-payroll legislation has been a clear driver in the proliferation and use of unregulated umbrella companies and related arrangements (some of which have then involved ‘disguised remuneration’ schemes) and the government should accept this and seek to implement legislative changes that create tax certainty for freelance workers which are appropriate and fair.
‘We believe that the off-payroll reforms, which are now being rolled out into the private sector from April 2021, should be amended during the passage of this year’s Finance Bill and that tax law and employment law should be aligned. The direct threat of being classed as a ‘deemed employee’ is a fundamental problem for contractors/freelancers and client organisations’.
The inquiry, which started in December, has examined how professional contract and freelance working should operate, be remunerated and taxed fairly and appropriately, and also to prevent tax avoidance schemes being promoted or existing at all.
The inquiry has found significant issues with the supply chain including recruitment agencies demanding ‘kickbacks’ or incentives from umbrella companies for being added to a preferred supplier list/recommended to clients, even sometimes including fitted kitchens and holidays for recruitment agency directors. This then incentivises non-compliant providers (who because of non-compliance have higher margins) to offer large bonuses to gain access to potential clients.
In some cases, contract, freelance and locum workers are being pushed to use a specific umbrella company and, in other cases, workers are given no choice as to which umbrella company to use, so the situation facing the worker is effectively ‘take it or leave it’. This is a particular problem when the only source of work in a sector is via recruitment agencies. This is the case for many workers including some lower paid contract and locum workers.
In some instances, public sector approved agencies and even public sector organisations themselves have recommended people use umbrella companies that have put them into ‘disguised remuneration’ schemes.
A general lack of transparency over deduction, fees and contractor pay/payments and some recruitment agencies ignoring the legal requirement to provide all workers with a Key Information Document (KID).
Some umbrella companies appear to be unlawfully deducting employer’s taxes from contractors’ pay.
It has also criticised the covert withholding of holiday pay by some umbrella companies, because the contractor did not know it was claimable. In some cases, this has also involved umbrella companies refusing to pay Covid furlough unless contractors waived their right to holiday pay.
A fundamental conclusion of the inquiry is that the unregulated umbrella market is ‘out-of-control, all too often exploiting contractors (often without them realising it) and is also a key reason for tax avoidance schemes operating and being so readily and openly advertised’.
The report calls on the government to announce plans to intervene and introduce statutory regulation for payroll intermediaries and also to make a number of changes to stamp out malpractice, including to strengthen, clarify and enforce the existing regulation that makes it unlawful for an employment business to offer a position that is conditional on using a specified umbrella company or payment intermediary, to stop workers being pushed or encouraged to opt-out of the Conduct of Employment Agencies and Employment Business Regulation 2003.
The MPs also wants to see the government ‘make it unlawful for agencies to get financial incentives or ‘kickbacks’ from umbrella companies, via timesheet commissions, introductions, or otherwise’, and to make it unlawful for a contractor to be forced or coerced to opt-out of the Conduct of Employment Regulations (unless they are working on an ‘outside IR35’ basis via a limited company (PSC)).
The Loan Charge APPG said a government review of self-employment should examine professional contract and freelance working, to come up with the best way of organising, remunerating and taxing this important and increasingly commonplace way of working. This should build on the recommendations in the Taylor Review, but also look at suggestions for different forms of company or tax status for freelance and contract workers, to come up with the best way for this important way of working to be organised.
Ruth Cadbury MP, co-chair of the Loan Charge APPG, said: ‘It is clear from our inquiry that there is significant non-compliance in the worryingly opaque supply chain, which has been dubbed ‘the Wild West’ as a result and the lack of regulation enables exploitative practices, as well as enabling promoters of tax avoidance schemes to operate.
‘If it is serious about clamping down on tax avoidance schemes, the government must legislate to clean up the supply chain and proactively stop schemes as they start, rather than merely trying to take retrospective action after the event.’
In response to the report, Dave Chaplin, CEO and founder of ContractorCalculator and IR35 Shield said: ‘There are some strong recommendations and worrying observations in this report and lots more work needs to be done so that contractors are treated fairly and properly. Before any legislation is passed, which won’t happen overnight, the supply chain should seek to introduce clear and better transparency to ensure workers are given full rights if they are considered to be “deemed employees” under the new off-payroll tax rules.
'Contractors who now find themselves “inside IR35” are in an untenable position – they are working PAYE but have none of the rights that come with permanent employment.’