Strengthening the Umbrella Industry to Support Tax Compliance

Tax compliance in the temporary labour market has been a long-debated issue, with some critics pointing to umbrella companies as a source of non-compliance. However, a closer examination reveals that the true risk lies not in umbrella companies themselves but in the lack of effective enforcement against tax avoidance schemes. Compliant umbrella companies are actually a critical part of the solution, helping ensure payroll compliance and reducing fraud.

The Real Source of Tax Non-Compliance

The problem is not umbrella companies as a whole but rather rogue operators that exploit loopholes. Non-compliant intermediaries engage in schemes like disguised remuneration and mini umbrella fraud, which are designed to avoid tax obligations. The solution is not to opt for Option 3 but to enforce stronger oversight to prevent these schemes from flourishing.

Recruitment agencies could also pose a compliance risk if they were required to handle payroll themselves. Many agencies operate on tight margins, and some might be tempted to cut corners or engage with non-compliant providers to reduce costs.

HMRC’s Role in Strengthening Oversight

A key issue in tax compliance is the lack of effective enforcement. HMRC’s estimates of the tax gap are based on uncertain data, yet these figures are often used to justify policy changes that could destabilise the labour market. Rather than imposing broad, disruptive measures, the focus should be on targeted enforcement against known bad actors.

Ensuring compliance within the existing umbrella company model, rather than modifying it, would allow HMRC to maintain control over tax collection while preserving stability in the labour market.