What happened to freedom of choice for contractors?

20th May, 2021

Within a month of the Off-Payroll working rules being extended to the private sector, the draconian legislation has contributed to a further imbalance of power in the UK’s contracting sector.

Having already prevented thousands of contractors from trading via their limited companies, the reform to IR35 has encouraged a worrying number of recruitment agencies and their ‘payroll’ providers to go rogue. The award of contracts is increasingly becoming conditional on the contractor in question using a specific umbrella or payroll company, with whom there is no guarantee of compliance from a tax perspective.

The true extent of this issue was revealed recently within the damning report published by the Loan Charge All-Party Parliamentary Group (APPG). How Contracting Should Work is an ironic title for the conclusion of an inquiry that exposed supply chain malpractice on various levels. The common theme among the various offences was that the fallout was mostly to the detriment of the contractors involved.

Non-compliant partners contrive to remove contractor freedom of choice

One of the key issues highlighted by the Loan Charge APPG was the tendency by some agencies to push contingent workers into using a specific umbrella company, comprising what the report described as a ‘take it or leave it’ offer.

This is despite the practice being flagrantly in breach of the Conduct of Employment Agencies and Employment Businesses Regulations 2003, which unequivocally states:

‘Neither an agency nor an employment business may make the provision to a work-seeker of work-finding services conditional upon the work-seeker using other services for which the Act does not prohibit the charging of a fee.’

Denying a contractor their freedom of choice might not appear the most scandalous offence at face value, as one would naturally assume that all umbrella companies perform the same function. As acknowledged within the report, though, many of the service providers that contractors have been encouraged to use aren’t umbrella companies but rather disguised remuneration schemes.

These are the types of tax avoidance vehicles that prompted the controversial 2019 Loan Charge, often unwitting engagement in which has left many contingent workers facing retrospective tax bills and penalties running into tens, or even hundreds, of thousands.

Buoyed by their exemption from the Loan Charge, scheme providers and the recruiters responsible for making the introductions have continued to mis-sell these schemes, placing an increasing number of contractors in jeopardy. With a relative lack of bargaining power, it is more often the lower-paid contractors who can scarcely afford such retrospective costs who are unknowingly falling prey to such schemes.

Is transparency key to ensuring supply chain compliance?

The various draconian measures introduced by Government have contrived to place many of the UK’s contractors between a rock and a hard place. So, what can be done? The umbrella market is notoriously unregulated, and with the Off-Payroll rules already four years old in the public sector, all indications suggest that HMRC has little interest in policing supply chain compliance.

Drastic action is needed. Among the Loan Charge APPG’s recommendations to tackle the issue was the introduction of statutory regulation to make it unlawful for contractors to be forced to opt-out of the Conduct Regulations, and: ‘To introduce mandatory transparency, so that all payment intermediaries and agencies must disclose all fees and costs and explain all deductions, both in documentation and on payslips.’

Speaking in Parliament last month, Co-Chair of the Loan Charge APPG Ruth Cadbury went a step further, calling for legislative action to remove umbrella companies from supply chains while asserting that agencies should instead run the contractors’ payrolls, stating: “They do for their own staff anyway, they do not need umbrella companies, and neither do their contractors.”

“We really need legislative action to stop these schemes in the first place and the misery they cause… The Finance Bill gives the government an opportunity to do this and to clean up the supply chain and stamp out tax avoidance schemes… This is an opportunity the government must take.”

Cadbury’s comments paint a rather simplistic and naïve view of the umbrella industry and overlook the crucial role that compliant umbrella companies play in helping agencies overcome their own often limited resources and compliance challenges, as well as various HR and administrative duties.

However, there is merit in the Loan Charge APPG’s proposals for mandatory transparency. This is a principle that we at Orca Pay Group centre our practices around. By displaying exactly where every penny has been paid, we ensure there is no room for malpractice, protecting our contractors in the process.

By making such practices a mandatory requirement, with rigid enforcement and strict penalties for those who fail to comply, Government could take a much-needed step towards levelling the playing field.

Orca Pay Group undertakes the necessary steps to ensure its umbrella employees are always treated fairly, and always retain their freedom. To find out whether we are the right choice of umbrella company for you, contact a member of our team on 0800 090 3798 or info@orcapaygroup.co.uk.