In May, amendments to the Finance Bill aimed at addressing and stopping malpractice in the umbrella sector failed to reach the voting stage, despite passionate speeches by David Davis MP and Iain Duncan-Smith MP.
Since then, a series of revelations have emerged, including a damning BBC Radio 4 File on 4 investigation, exposing non-compliance within the industry and calling for regulation of what many have dubbed the ‘wild west’. However, who are these unscrupulous companies and what do they look like? Are they presenting themselves as umbrellas, payment intermediaries or something else entirely?
Starting point: Definition
For regulation of the sector to be successful, there must firstly be a universally agreed and understood definition of an umbrella company. While this sounds straightforward, the preceding years have proved that rigid definitions make it easier for non-compliant operators to sidestep so that their operations fall outside the defined scope.
A broader definition, like payment intermediary, would be harder to bypass. A payment intermediary is a company that interposes itself between the recruitment company or end client and the contractor. Such a definition covers all of the arrangements we have come to recognise as non-compliant without using a specific label, like umbrella company.
Only when we have the broadest possible definition that captures all entities making up the ‘wild west’ can there be effective enforcement.
Taking action: Enforcement
Enforcement is expensive, but without it, there’s little incentive to play by the rules. In fact, a lack of enforcement coupled with a series of ongoing rule changes actively enables non-compliant providers to flourish in today’s market.
Of course, legislation and regulation already exist, with a body or bodies responsible for enforcement. For example, the Government has recently announced that it will be setting up a Single Enforcement Body comprising HMRC, EASI and The Gangmasters Labour Authority. These bodies have powers to legislate, regulate and enforce, so why is non-compliance still widespread?
The Payday-by-Payday model has seen HMRC issue a number of warnings about its non-compliance. Despite the prevalence of the model in the market, no cases were brought by HMRC. Furthermore, rule changes came into play that effectively closed down the model, but those ignoring the rules simply stopped the offering and faced zero consequences.
A more serious example comes in the form of the loan charge, which saw HMRC retrospectively change the legislation to enable greater reach of enforcement. However, rather than pursue the promoters of these arrangements, HMRC sought the individuals duped by them. Once again, promoters got away and were allowed to keep all of the money they had made from innocent victims.
Such offerings are still prevalent today, with many going so far as to blatantly promote themselves as a tax-avoiding option. With workers facing significant income drops due to the Off-Payroll rules, market conditions have been ideal for these providers who are confident HMRC will go after the individuals, therefore enabling them to keep the money.
Such a lack of action serves to incentivise more of these providers to enter the market. The additional gut-punch is that HMRC has all of the data to identify and shut down these arrangements but is not taking the proactive steps to do so.
It proves that creating another ‘regulator’ won’t change anything without enforcement. If current regulators don’t have the resources to apply the necessary enforcement, then extending the reach of already over-stretched bodies (such as those that are part of the Single Enforcement Body) won’t change anything. In fact, this was the Government’s response to the proposed amendments to The Finance Bill in May.
Whilst it is good news that the Government is keen to step up its enforcement activity to protect the rights of workers and clamp down on bad practice in the labour market, a single enforcement body may not provide the answer and could significantly dilute enforcement activity as each department works together to navigate their way through the issues.
Having spent a major part of my career in financial services and witnessing the introduction and development of regulation in the insurance sector, I believe lessons can be applied to the recruitment and payment intermediary sectors.
Regulators in financial services have come to realise that individual enforcement across thousands of small companies, typically financial advisers, is almost impossible. The result was the creation of compliance networks, which took on the responsibility of compliance for their members and provided a central point for regulation. Large companies could register and be directly regulated, dramatically reducing the number of companies that required direct enforcement.
A proactive rigorous and robust enforcement is critical to stamping out the bad practice in the labour market and I would suggest that the Financial Services industry holds a clue to what might work more effectively in the form of a compliance network.
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