Labour manifesto rains on umbrella companies’ parade

Raining inside an umbrella
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Tom Herbert
Acting Editor
AccountingWEB
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A Labour Party manifesto pledge to outlaw umbrella companies has been hailed by activists for protecting workers’ rights, but labelled impractical and ‘foolhardy’ by industry insiders.

With election campaigning reaching its final stages the world of commerce has been holding a microscope to party manifestos. One area that has garnered interest from business is the Labour Party’s plan to ban controversial ‘umbrella’ companies.

Used as an intermediary between contractors and their client, umbrella companies act as a de facto employer, in theory allowing workers to retain the flexibility of contracting while being eligible for PAYE and NI contributions, and removing paperwork from the contractor (for a fee usually taken as a percentage of a worker’s salary).

However, umbrella firms have come under fire from employee groups and trade unions for denying some workers basic employment rights and shifting the employer’s responsibility to pay national insurance contributions (NICs) and pensions to the employee.

False structures

Among its commitments to workers’ rights the Labour Party manifesto contains the following pledge on page 51:

“Banning payroll companies, sometimes known as umbrella companies, which create a false structure to limit employers’ tax liabilities and limit workers’ rights.”

The manifesto acknowledges that self-employment brings many benefits, freedoms and flexibilities and is a “vital and often entrepreneurial sector of our economy”, but flags the “mounting evidence that workers are being forced into self-employment by unscrupulous employers to avoid costs and their duties to workers”.

An estimated 450,000 workers are paid through umbrella companies, and Labour’s pledge comes as a direct response to the rise in the use of such firms.

The increase has been particularly notable in the hospitality and construction industries, where large volumes of temporary workers are often required to work on short-term projects and there have been numerous media reports of staff being forced to pay extra tax and administration fees.

Lack of manpower

Graham Farquhar, employment tax partner at RSM, believes the pledge is "a sledgehammer to crack a nut".

Farquhar highlighted the fact that the issues raised in Labour’s manifesto and the media are often caused by a lack of enforcement of the existing laws.

“There are laws at the moment, but they’re just not being enforced,” he said. “The reason for that is the Revenue doesn’t have the resources to police this effectively – it just does not have the manpower.

“Most umbrella companies will also argue they’re tax compliant and provide workers with more rights than any other scenario.”

Small number of unscrupulous operators

According to Julia Kermode, chief executive of the Freelancer & Contractor Services Association (FCSA), the poor public perception of umbrella companies has come from workers who are mistreated by a small number of unscrupulous operators calling themselves umbrellas.

“Some firms suggest they’re an umbrella firm when they aren’t,” said Kermode. “If a worker is not on an overarching contract of employment then it isn’t an umbrella – that’s their whole purpose.

“Compliant umbrella firms offer all 84 statutory rights of employment, and a good umbrella firm gives an individual all their rights while providing the flexibility to work on a number of different contracts.

“To put it bluntly this shows that Labour doesn’t know what they’re talking about. It also seems foolhardy to ban umbrella companies unilaterally considering that the sector is worth more than £3bn in tax and NI contributions to the exchequer annually.”

Practicalities

The problem the manifesto pledge seeks to fix is one of workers’ rights, but is difficult to see how a ban on umbrella firms would work in practice.

The FCSA is not aware of a government that has come into power and outlawed a section of the economy before, and RSM’s Graham Farquhar believes that for such a ban to be successful the government of the day would have to carefully define the term ‘umbrella company’.

“For example,” said Farquhar, “if a ‘normal’ company gets someone to deal with their payroll what’s the difference?

“If you didn’t have umbrella companies undertaking payroll you would have contractors having to deal with it themselves, and you’d have to think about how you’d police that.

“Some of these people, the last thing they understand is payroll, so what would you do? It would need to be a real attack on the contractor sector as a whole”.

Replies

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By NH
31st May 2017 11:14

"There are laws at the moment, but they’re just not being enforced"
This is the problem as I see it at the moment, many clients are being taken for a ride by these "umbrellas" but they all feel powerless to do anything about it

Thanks (3)
31st May 2017 11:43

Eh?

Are we all reading the same paragraph?

It says banning those that create false structures. What ever that may mean.

it doesn't say banning all umbrella companies.

Do journalists deliberately misread stuff to make up a story?

I think they are bang on myself to tackle this area.

Thanks (1)
to ireallyshouldknowthisbut
31st May 2017 12:02

Thanks for the comment IRSKTB, no deliberate misreading going on here, honest gov'.

I agree that the area needs to be looked at, and I picked up this story because it is a radical suggestion for tackling these types of companies.

The paragraph in question is open to interpretation, but I would read it as stating that all umbrella companies create false structures and should be banned, and that's certainly the impression the contractor and freelance specialists I spoke with had as well.

I got in touch with the Labour Party's press office yesterday to try and clarify this but am still waiting for an answer. Will keep you posted.

All the best,

Tom

Thanks (1)
to TomHerbert
31st May 2017 14:32

And here's what a Labour Party spokesperson emailed across to me:

“Labour is proposing a package to strengthen workers’ rights and people’s ability to enforce those rights to access justice at work, for dignity and equality in the workplace, and to end the race to the bottom that we have seen in recent years. This includes taking action to end bogus self-employment whose growth has been aided by unscrupulous ‘umbrella companies’, but also actions to simplify the relationship between workers and those directing their work to make it easier for workers and trade unions to enforce rights, and to ensure that those acting as employers or intermediaries pay their fair share of tax.”

Certainly a bit more clarity, but doesn't answer the 'ban them all' / 'ban some of them' question.

Thanks (0)
to TomHerbert
31st May 2017 14:48

I dont know Tom, if I said I was going to close down accountants who create false tax structures, would you automatically assume i was going to close down all accountants? I wouldn't.

Seems like a large leap to me, but this seems how the media works, which is why so many people are disengaged from it. Click bait has a short shelf life and destroys trust.

I cant believe the fuss they made yesterday about a politician checking the answer to a question to ensure they got their facts right, as opposed to discussing the actual policy that had been proposed.

Thanks (5)
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31st May 2017 15:11

Would be interesting to see how a government distinguished between say an 'umbrella company' and a temporary staff agency.

Both employ individuals, manage their payroll and provide the services of the individual to end users while giving them the flexibility to manage their workload.

Temp agencies have been around for decades, and are an accepted part of the labour market enabling employers to deal with peaks and troughs of demand for staff.

Any legislation in this area would have to be very carefully worded to avoid throwing baby out with the bath water, leaving a situation where you're either directly contracted with the end user of your services as an employee or you're genuinely self-employed.

Thanks (0)
31st May 2017 18:46

As most of the umbrella companies seem to be dealing with public sector contracts, how about the Government sets an example by only employing its workers under proper contracts of service?

Thanks (6)
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02nd Jun 2017 14:49

My observation is that implementing this policy would risk making the same mistake as Labour did with the managed service companies (MSC) rules - in that the umbrellas ensure that all due tax is paid and returns etc filed correctly.

The MSCs (I had some dealings with JSA) allowed agency workers to get on earning their contract income, while "outsourcing" the company admin, for a fee.

Post-MSC, all those workers would have either "gone it alone" or then gone via an accountancy firm such as SJD.
There is no guarantee that the "loners" would have filed correct amounts and returns, whereas previously the MSC would have kept everything shipshape.

Indeed if they had not sufficient provision in the LtdCo, they might well have phoenixed and left HMRC owing amounts .... though I have no data on this.

Surely "good" umbrellas perform that role as well.

But one hears bad things from teachers who are working through these organisations, in terms of them skimming off a grossly overblown margin for themselves.

The other point is that many end-client companies would not engage the freelancer as self-employed - they require an LtdCo of some kind to take the risk for PAYE and NI liability.

Thanks (0)