Loan Charge APPG report should signal end of umbrella holiday pay malpractice

22nd April, 2021

The Loan Charge All-Party Parliamentary Group’s recent inquiry has revealed some shocking – as well as some less surprising – truths about the UK umbrella company industry.

Loan Charge APPG report uncovers shocking truths

How Contracting Should Work sought to understand the reality of contracting in the UK, with the widespread mis-selling of ‘disguised remuneration’ schemes that resulted in the controversial HMRC Loan Charge a dominant theme throughout the resulting report. Though deeply concerning, this is little surprise to anybody in the industry, and the report will only compound existing pressure for the taxman to be more proactive in tackling scheme operators.

More startling to many will be the revelation about the ‘covert withholding of holiday pay’ by some umbrella companies, and the uses to which the retained sums are being put. Addressing the issue, the Loan Charge APPG report states:

‘This inquiry has been sent evidence that contract and freelance workers who use umbrella companies have had holiday pay withheld by their umbrella company, usually covertly, because the contractor or freelancer is not aware that they should be paid it. It’s been suggested that some contracts with some umbrella companies actually contain clauses that if holiday pay is not claimed within the holiday year, it is forfeited by the contractor and retained by the umbrella company.’

Elsewhere, the report acknowledges that the sums retained by non-compliant umbrella companies are sometimes being used to fund ‘kickbacks’ paid to recruiters in exchange for a position on a preferred supplier list (PSL) or a recommendation to a client, adding: ‘A fee of £30k is not uncommon.’

Why has holiday pay malpractice gone under the radar?

In the withholding of holiday pay, the Loan Charge APPG inquiry has thankfully shone a light on an issue that has long gone under the radar for various reasons. The first of which is the fact that most affected workers are unaware of their holiday entitlements in the first place, and simply don’t notice their missing income.

Making malpractice easier for unscrupulous umbrella companies to keep under wraps is the fact that unclaimed holiday pay doesn’t need to be reported in Real Time Information (RTI) submissions to HMRC. These two factors combined have contributed to the astronomical sums that some umbrella companies have managed to collect.

The lack of impact on the taxman is another crucial component. With disguised remuneration so damaging to the Exchequer, Government’s own activity has ensured that tax avoidance remains a hot topic. But with HMRC’s tax yield unaffected by the withholding of holiday pay, Government has shown little interest in remedying this non-compliant practice.

Until now.

Umbrella company holiday pay negligence must end now

At Orca Pay Group, our concept of a compliant umbrella company extends beyond simply correctly paid tax liabilities. We have long held that being compliant is also about treating umbrella employees correctly by affording them their full legal entitlements. This may sound obvious, but it’s staggering how many firms within the industry apparently disagree.

Our ethos is reflected through our service offering. Our payroll and compliance solution, The Apex, returns a running calculation of each employee’s accrued holiday pay. It also pays out any outstanding holiday at the end of each calendar year, ensuring our umbrella employees receive every penny that’s owed to them.

The Apex also conducts a comprehensive compliance audit each time a payroll is run. And whereas the automated delivery of timestamped business tax statements from HMRC provides verification that all tax liabilities are being correctly paid, The Apex’s monthly third-party compliance audit by WTT Consulting confirms that our employees are also being paid their full entitlements. That’s the difference.

The time has been long overdue for non-compliant umbrella companies to follow suit and adopt a compliant approach that fairly rewards their workers. For too long, too many within the industry have capitalised on a lack of transparency and clarity, resulting in the exploitation of the very individuals whose labour underpins their business.

Enough is enough; the time for change is now.

Contractor backlash beckons for non-compliant umbrellas

For those umbrella companies that fail to change their ways, the signs look ominous. The Loan Charge APPG inquiry is timely in that it has raised awareness of the issue among contractors just as thousands embark on umbrella engagements following the extension of the Off-Payroll rules to the private sector.

Having directed their own limited companies for years, many of these contractors are business savvy and won’t be easily deceived. Umbrella companies that continue to try their luck can expect contractors to take a stand.

One such example emerged last month on BBC Radio 4’s Moneybox programme, which spoke to an anonymous contractor who had been moved into an umbrella company in anticipation of the Off-Payroll reform. After initially being refused holiday pay having taken time off during the Christmas period, the contractor and several colleagues had to threaten employment tribunal (ET) action before their umbrella company paid out the circa £6,000 owed to each of them.

This looks like a path that could become increasingly well-trodden unless the umbrella industry stamps out holiday pay malpractice. With the Loan Charge APPG pressuring Government to conduct a review of the issue and ultimately outlaw holiday pay, things could go from bad to worse for those who continue to abuse their umbrella employees.

Orca Pay Group ensures its employees receive their full holiday pay entitlement while giving them the visibility to see exactly how much has been accrued and/or paid. To discuss our services and payroll solutions in more detail, contact a member of our team on 0800 090 3798 or