Increase in use of umbrella companies after changes to off-payroll working rules

Almost a year on from implementing the off-payroll working reforms in the private sector the Economic Affairs’ Finance Bill Sub-Committee has written to the Government raising concerns about the increase in umbrella companies and the need for a more coherent approach to the issue of employment status.

The off payroll working reforms (IR35 rules) are aimed at preventing tax avoidance where an individual is engaged through an intermediary. IR35 applies if the individual would have had employee status had they been engaged directly by the end client.

Reformed IR35 rules have applied to the public sector since April 2017 and were extended to the private sector from 6 April 2021.

The Sub-Committee made a number of recommendations to the Government including the following:

1. Umbrella companies

The extension of the off-payroll working rules to the private sector has led to an increased use of umbrella companies. The Sub-Committee has suggested there is an increasing risk that some individuals, particularly those on low incomes, will become involved in rogue umbrella companies which are associated with tax avoidance whereby workers receive 20% less pay, as the arrangement makes them responsible for their employer's National Insurance contributions. The Sub-Committee has recommended that the government commits to a date for bringing forward legislation to create a proposed single enforcement body to regulate umbrella companies.

2. Employment status

The Sub-Committee has stated that it is unfair that individuals are treated as employees for tax purposes but do not enjoy the rights which are normally associated with employment and therefore the Government must take a more coherent approach to the issue of employment status, which considers both tax and employment rights. The Sub-Committee has recommended that the Government should proceed with implementing the proposals set out in the Taylor Review.

The Sub-Committee has requested a formal response from the Government to its recommendations.