The TUC is the voice of Britain at work. We represent more than 5.5 million working people in 48 unions across the economy. We campaign for more and better jobs and a better working life for everyone, and we support trade unions to grow and thrive.
Our affiliated unions represent workers using umbrella arrangements across a range of sectors in the labour market, both in the private and public sector. Umbrella arrangements affect agency workers working via recruitment agencies and independent contractors carrying out work for organisations.
Unions report that union members working under these arrangements experience a multitude of problems ranging from a lack of transparency over core terms and conditions such as pay rates, to unwittingly becoming embroiled in fraudulent tax arrangements with serious financial consequences.
We welcome the opportunity to engage with this consultation and present our views on the most effective way to stamp out worker exploitation in the umbrella industry.
The TUC believes that the only effective way to prevent the exploitation of workers by umbrella companies is to prohibit recruitment agencies and employers from using them.
Reports have suggested that ‘umbrella’ companies may be costing workers and the exchequer as much as £4.5bn a year, with £1bn in lost revenue from fraud including mini-umbrella companies.
The Freelancer & Contractor Services Association (FCSA) is a leading membership body for umbrella companies. It has confirmed that the unlawful tax practices adopted by umbrellas means that “HMRC are also robbed of essential tax revenue that could be supporting essential services”.
The TUC believes that there are alternative arrangements for handling recruitment agencies’ payroll functions that would not involve the exploitation of workers.
We support the view of Unite the Union, which has many members affected by umbrella arrangements, that there is no need to use umbrella companies “in a modern economy with numerous electronic and digital payroll solutions”.
There are different estimates about the numbers of workers using umbrella companies. They all suggest that a large, significant number of workers are using them.
Around 325,000 freelancers are estimated to be using umbrella arrangements.
HMRC estimates suggest that there has been an increase in the number of individuals working through an umbrella company from 100,000 in the tax year 2007/08 to at least 500,000 in the tax year 2020/21.
In 2020, the FCSA published an article suggesting the number of umbrella employees had increased to 625,000 with around 400 to 500 umbrella companies operating in the UK.
HMRC, public bodies and tax experts have also indicated that there has been a shift in how hiring organisations approach the contracting and procurement of services following the IR35 reforms. This includes the increased use of umbrella companies, acting as intermediaries for multiple contractors. HMRC has observed an increase in the number of people employed by umbrella companies.
As employers seek to comply with IR35 or avoid their employment/payroll obligations, it is likely the use of umbrella companies will increase.
There are two principal reasons why umbrella arrangements are used by recruitment agencies and employers.
Firstly, they reduce the administration associated with employing workers. The agency or employer no longer has to operate a payroll and they can escape their responsibilities, such as obligations under the employment rights framework. The TUC believes that organisations and recruitment agencies should take responsibility for paying their staff and ensuring their workers’ employment rights are upheld.
Secondly, recruitment agencies are given substantial financial incentives to use umbrella companies. This is where the use of umbrella companies significantly differs from other outsourced payroll services. Instead of recruitment agencies paying a fee for another organisation to operate their payroll, the agency is actually given a referral fee (or other form of financial incentive) for every worker passed to the umbrella company.
This was confirmed in a report by the Loan Charge All-Party Parliamentary Group:
Recruitment agencies demanding ‘kickbacks’ or incentives from umbrella companies for being added to a preferred supplier list/recommended to clients, even sometimes including fitted kitchens and holidays for recruitment agency directors. This then incentivises non-compliant providers (who because of non-compliance have higher margins) to offer large bonuses to gain access to potential clients.
Often umbrella companies are used so that recruitment agencies and their directors can make more money at the expense of the worker. The worker pays for this, when a proportion of their salary is deducted to pay an operating fee to the umbrella company.
Questions 1-3. Defining umbrella companies.
The TUC does not believe that either of the options are broad enough in scope to cover all workers who use umbrella arrangements. As we’ve flagged above, it is estimated that 325,000 freelancers/independent contractors use umbrella arrangements. These workers seem to be excluded from the two proposed definitions, as the proposed definitions only cover workers who use umbrellas via an employment business. Many independent contractors using umbrella arrangements would not use an employment business.
The TUC believes that the proposed definitions have been developed with the pre-determined view that EAS would regulate umbrella companies, and therefore only umbrella workers who are engaged by employment businesses are covered. Any regulatory definition should take into account the full range of workers who are affected by umbrella arrangements and make sure the definition is broad enough in scope to cover these workers.
Questions 4-5. Umbrella company standards.
Given the wide-ranging, egregious exploitation faced by umbrella workers, the TUC believes that the most appropriate and effective way to stamp out the exploitation caused by umbrella companies is to prohibit recruitment agencies and employers from using them.
However, if the government is committed to introducing further regulation that enables umbrellas to continue to operate, then we suggest they consider more effective regulatory solutions:
There should be further consultation, including with trade unions that represent umbrella workers, to determine the regulatory standards that should be implemented to stamp out worker exploitation.
Questions 6-8. Enforcement of umbrella company standards.
The TUC believes that given the expertise of EAS staff and their knowledge of the recruitment sector it is the enforcement body best placed to regulate umbrella companies.
However, the EAS does not currently have enough resources or experience of the freelancer/contractor industry to effectively regulate umbrella companies. Therefore, its remit and resources would have to be expanded significantly.
The EAS does not have the resources to tackle exploitation by umbrella companies. The TUC believes that EAS is under resourced to carry out its existing regulatory duties in the recruitment sector. There are approximately 40,000 employment agencies operating in the UK. Yet the EAS is expected to regulate the agency sector with just 19 inspectors. Neither is the wider labour market enforcement system equipped to effectively regulate umbrella companies. The International Labour Organisation (ILO) benchmark for inspectors, which it recommends all countries meet, is one labour market inspector per 10,000 workers. Unique TUC analysis of labour market enforcement statistics shows that the UK would need an additional 1,797 labour market inspectors to meet the ILO benchmark.
The TUC believes that the EAS should be given enhanced powers to enable it to regulate the umbrella sector effectively. The EAS should be able to issues civil penalties (fines) to umbrella companies that flout regulations and existing employment law. This would create a deterrent effect for other umbrella companies and strengthen the existing enforcement approach of the EAS.
It's also vital that the EAS is resourced to be able to undertake both reactive and proactive investigations. Both approaches have their merits and are not mutually exclusive, if an inspectorate is resourced sufficiently.
In response to paragraph 3.48 the TUC firmly believes that unions should be able to bring claims on behalf of umbrella workers who are exploited and that the EAS should not just accept complaints from individuals. Trade union reps and officials are a trusted source of advice in the workplace and workers often rely on union reps and officials for advice and support when resolving workplace disputes.
Question 9-20. Option 1: Mandating due diligence.
The TUC believes that a legal requirement, on both agencies and the end hirer, to carry out a robust due diligence process could reduce both employment rights and tax non-compliance in their supply chains. Effective due diligence processes would require organisations to undertake checks which would help them uncover unlawful and exploitative practices from labour market intermediaries trying to operate in their supply chains.
A legal requirement to follow a robust due diligence process and carry out regular risk assessments, of any likely breach of tax and employment rights legislation in their supply chains, would probably reduce the use of umbrella companies. Unlike agencies, end hirers have little financial incentive to use umbrellas but could shoulder significant responsibility.
However, the TUC is concerned that questions 9-20 predominantly focus on tackling tax non-compliance via a new due diligence requirement. Whilst it is important that HMRC can effectively recoup the tax it is owed, it is also important that end hirers and recruitment agencies carry out due diligence to ensure that labour market intermediaries in their supply chains comply with relevant employment standards and employment rights obligations.
The consultation focuses on tax non-compliance which is evident by the very specific tax proposals put forward in the consultation document. But any new due diligence requirement must extend to compliance with employment rights in supply chains.
The TUC supports mandatory due diligence processes and is part of a campaign group calling for robust new mandatory human and labour rights and environmental due diligence legislation in the UK. We’ve set out the core components of an effective due diligence process:
In the context of umbrella companies, the TUC believes it is important for any due diligence procedure to take into consideration the following key factors:
Question 21-33. Option 2: Transfer of tax debt that cannot be collected from an umbrella company to another party in the supply chain.
The TUC supports option 2. As the consultation points out, when HMRC cannot recoup a tax liability from the umbrella company it will pursue the worker for the debt. The TUC welcomes any provision that will enable HMRC to pursue other actors in the supply chain, other than the worker.
Umbrella working arrangements are extremely complicated and many workers and agencies are not aware of the full tax and employment rights implications of working under these arrangements. Also, many workers will accept agency assignments at extremely short notice, so it is not practical for workers to check or fully understand the potential consequences of working with an umbrella. This is one of the reasons why we believe an outright ban on umbrellas is necessary. Failing that, ensuring that the tax debt can be transferred to another organisation in the supply chain is a positive step.
The TUC believes that this option would remove the incentive that organisations currently have to effectively outsource their payroll responsibilities to umbrella companies, by introducing a potential liability in the event that the umbrella company does not comply with its obligations.
The TUC believes that HMRC should be able to transfer and recover a tax debt from both the employment business and end hirer in the supply chain.
The TUC believes that regardless of whether an employment business or end hirer has exercised due diligence in deciding to contract with a particular umbrella company, they should still be liable for the transfer of a tax debt. If that organisation had carried out effective due diligence then arguably it would not have contracted with an umbrella company that chose not to pay their tax liability.
The TUC believes that both options 1 and 2 could operate alongside each other.
Question 34-41. Option 3: Deeming the employment business which supplies the worker to the end client to be the employer for tax purposes where the worker is employed by an umbrella company, moving the responsibility to operate PAYE.
The TUC does not support this option.
We do not believe there should be a deemed employer with responsibility for ensuring the correct tax and national insurance are paid, unless they also have responsibility for the employment rights of the worker as well.
The effect on the worker would be to have one employer for pay purposes and one employer for employment rights purposes. This is an unreasonable position to place a worker in.
Umbrella arrangements are already complicated enough with many umbrella companies and agencies not understanding that the umbrella company will be the legal employer of the worker. Workers are passed between umbrella and agency with neither taking responsibility for their employment rights obligations. This proposal has the potential to exacerbate this situation.
There are steps that the EAS could take immediately, rather than waiting for new regulation:
 Savage, M. (November 2021). “Suicides linked to HMRC cash demands in ‘loan charge’ tax bills”, The Observer
 Offshore Wind Industry Council (June 2023). “Offshore Wind Skills Intelligence Report”. Offshore Wind Industry Council.
 Jolly, J. (May 2021). “Hidden cost of umbrella companies in UK ‘may top £4.5bn a year", The Guardian
 Freelancer & Contractor Services Association (July 2021). “Banning Umbrella Companies Is Not The Answer – FCSA Responds To TUC Statement”, FCSA website.
 HM Revenue & Customs (July 2021). Tackling disguised remuneration tax avoidance, HMRC.
 Ibid footnote 9
 H Treasury et al (November 2021). Call for evidence: umbrella company market, HM Treasury https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037093/Umbrella_Company_CfE_Final.pdf
 National Audit Office (February 2021). Investigation into the implementation of IR35 tax reforms, National Audit Office
 Loan Charge All-Party Parliamentary Group (April 2021). “Inquiry on ‘How Contracting Should Work”, Loan Charge All-Party Parliamentary Group
 Chartered Institution of Taxation (March 2021). Labour Market Intermediaries, Chartered Institution of Taxation
 Department for Business, Energy and Industrial Strategy answer in response to written parliamentary question (UIN 122725)
 International Labour Organisation (November 2006). “Strategies and practice for labour inspection”, Committee on Employment and Social Policy, International Labour Organisation
 Office for National Statistics, A01 and EMP17 data tables
 Kermode, J, (16 May 2023). “FCSA Decision In Umbrella ‘Skimming’ Case”. Iwork.
 (22 March 2021). “BBC Moneybox exposes FCSA umbrella accused of withholding £000’s from contractors”. Contractor Calculator.
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