'Disgraceful' umbrella companies are withholding holiday pay from workers , says co-chair of Parliamentary group

Greg Smith MP, the Co-Chair of the Loan Charge and Taxpayer Fairness All Party Parliamentary Group, made the comments after a Freedom of Information (FOI) request submitted by a Yorkshire company revealed that the number of people working through umbrella company schemes more than tripled in the lead-up to the Government’s introduction of new off-payroll working rules.

Hudson Contract, which is a major provider of professional services to the UK construction industry, asked HM Revenue and Customs how many individuals had entered umbrella company arrangements as a result of IR35 reforms in an FOI. The off-payroll working rules can apply if a worker, who is sometimes known as a contractor, provides their services through their own limited company or another type of intermediary to a client. The IR35 rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees, according to the Government.

In response to the FOI, HMRC said: “HMRC estimates that the number of individuals working through umbrella companies has grown from 150,000 individuals in 2013-14 to at least 500,000 in 2020-21."

HMRC said there had been a number of factors affecting the labour market during this period, including the pandemic, which have influenced the ways in which individuals provide their service and it is not possible to determine how many workers moved solely as a result of the reform of the off-payroll working rules.

Hudson Contract managing director Ian Anfield said: “We are concerned but not surprised at the proliferation of umbrella companies. The deplorable practice of agencies charging inflated fees to contractors to fund dubious rebates is sadly commonplace. The case for proper regulation of this ‘Wild West’ market is growing stronger by the day. Some umbrella companies take tax from individuals and don’t pay it over to HMRC. Some are just mismanaged and give credit they cannot afford and then go bust and others are just incompetent and don’t pay the right amount of tax.”

Mr Smith said: “Far from simplifying working arrangements, the roll-out of the IR35 off-payroll rules has led to a huge proliferation of umbrella companies, which confuses things further but also has seen the scandal of some umbrella companies skimming pay and withholding holiday pay, as well as pushing unsuspecting people towards tax avoidance promoters. These are all disgraceful practices that must be stamped out.”

Chris Bryce, the chief executive of the FCSA (Freelancer and Contractor Services Association), said “We broadly agree with Hudson Contract’s view on this. There’s no doubt that the off-payroll rules have driven an increase in the use of umbrella company services across the UK as major clients have opted to take the risk-averse route of simply not using contractors as they once did. “

Mr Bryce said that this can leave the door open for unscrupulous offers of unrealistic take-home pay levels.

He added: “FCSA’s strong advice is that if it sounds too good to be true then it generally is and schemes which offer high rates of take-home pay often end-up with the workers owing HMRC a lot of money while the scheme perpetrators have pocketed the difference. Using a good, compliant, umbrella company will ensure that workers receive their full employment benefits such as sick pay, pension contributions and maternity leave.”

Steve Packham, spokesperson for the Loan Charge Action Group said the “misguided” IR35 off payroll rules have led to a huge proliferation of umbrella companies “profiting from the mess the reforms have created”.

A Government spokesperson said: “Protecting and enhancing workers’ rights – including for those employed by umbrella companies - is a priority for this government.

“We have already introduced requirements to improve the information provided to new agency workers about their contractual terms and pay rates. The off-payroll reforms have succeeded in making the tax system fairer, with more people who work like employees paying tax like employees.”

The Government spokesman said there is no evidence that a significant proportion of those affected by the 2021 off-payroll working reform have moved to working for non-compliant umbrella companies operating tax avoidance schemes.

The spokesman added: “The 2017 and 2021 reforms were introduced because the off-payroll rules, which exist so that those working like employees (but through their own company) pay the same tax as employees, were not being followed. HMRC estimated nine out of ten of those within the rules were not complying with them. Without the reforms put in place, the cost to the public purse was estimated to have been £1.3bn per year by 2023/24, which would not have been fair to the vast majority of honest taxpayers.”

The spokesman added: “The UK has one of the best workers’ rights records in the world, including generous holiday pay and high standards for workplace safety.

“Agency workers are entitled to paid annual leave in line with other workers. All agency workers accrue holiday whilst on assignment. Workers accrue from the first day of an assignment; there is no qualifying period to accrue paid annual leave.

“We want to support a dynamic and flexible labour market but it’s important that new models of working do not lead to workers being deprived of the employment rights to which they are entitled.”