Government must take action to clean up the ‘Wild West’ supply chain that exploits freelance and contract workers and encourages tax avoidance schemes

The Loan Charge APPG has today published a powerful report on their inquiry into ‘How Contracting Should Work’ which has exposed significant non-compliance and malpractice in the supply chain by many umbrella companies and recruitment agencies.  Some of this has driven the operation and mis-selling of tax avoidance schemes which has caused the supply chain to be dubbed a ‘Wild West’ by many professionals.  The report is here.

The inquiry, which commenced in December, has examined how professional contract and freelance working should operate, be remunerated and taxed fairly and appropriately and also to prevent tax avoidance schemes being promoted or actually existing at all. The inquiry received written submissions and included an oral evidence session on Tuesday 15th December 2020.  This Inquiry is an important part of addressing the factors that led to the situation people are in, facing the Loan Charge (and other related HMRC action, for use of ‘disguised remuneration’ schemes).  The Loan Charge APPG was set up in in early 2019 and the Loan Charge Inquiry, which was published in April 2019, examined how people came to use the arrangements now subject to the Loan Charge, as well as how the Loan Charge was introduced.  This Inquiry goes a stage further, into examining in detail the reality of professional contracting and freelance working, the different ways of organising and structuring such work and the issues that have led to the use of schemes now subject to the Loan Charge.

The ‘How Contracting Should Work’ Inquiry has found significant issues with the supply chain including:

  • 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.
  • In some cases, contract, freelance and locum workers are being pushed to use a specific umbrella company and, in other cases, workers are given no choice as to which umbrella company to use, so the situation facing the worker is effectively ‘take it or leave it’. This is a particular problem when the only source of work in a sector is via recruitment agencies. This is the case for many workers including some lower paid contract and locum workers.
  • In some instances, public sector approved agencies and even public sector organisations themselves have recommended people use umbrella companies that have put them into ‘disguised remuneration’ schemes.
  • A general lack of transparency over deduction, fees and contractor pay/payments and some recruitment agencies ignoring the legal requirement to provide all workers with a Key Information Document (KID).
  • Some umbrella companies appear to be unlawfully deducting employer’s taxes from contractors’ pay.
  • The covert withholding of holiday pay by some umbrella companies, because the contractor did not know it was claimable. In some cases, this has also involved umbrella companies refusing to pay Covid furlough unless contractors waived their right to holiday pay.

A fundamental conclusion of the ‘How Contracting Should Work’ Inquiry is that the unregulated umbrella market is out-of-control, all too often exploiting contractors (often without them realising it) and is also a key reason for tax avoidance schemes operating and being so readily and openly advertised.

It is clear that the current system of voluntary regulation and accreditation does not stop the facilitation of tax avoidance schemes and does not stop malpractice in the supply chain (by both umbrella companies/payroll intermediaries and also recruitment agencies).

The report calls on the Government to announce plans to intervene and introduce statutory regulation for payroll intermediaries and also to make the following changes to stamp out malpractice:

  • To strengthen, clarify and enforce the existing regulation that makes it unlawful for an employment business to offer a position that is conditional on using a specified umbrella company or payment intermediary, to stop workers being pushed or encouraged to opt-out of the Conduct of Employment Agencies and Employment Business Regulation 2003.
  • To make it unlawful for agencies to get financial incentives or ‘kickbacks’ from umbrella companies, via timesheet commissions, introductions, or otherwise.
  • To make it unlawful for a contractor to be forced or coerced to opt-out of the Conduct of Employment Regulations (unless they are working on an “outside IR35” basis via a limited company (PSC)).
  • To make it a statutory obligation to quote only PAYE contract rates for temporary worker engagements that are not “outside IR35”.
  • To outlaw the withholding of holiday pay and at the same time introducing the recommendation from the Taylor Review, allowing contractors to receive, by default, their holiday pay “rolled up”.
  • To introduce mandatory transparency, so that all payroll intermediaries and agencies must disclose all fees and costs and explain all deductions, both in documentation and on payslips, as well as ensuring recruitment agencies provide Key Information Documents to all workers.
  • To clarify the situation regarding employer’s tax and National Insurance contributions.

The Loan Charge APPG is also calling on all freelance and contract workers and advisers, who have experience of and evidence showing these practices, to report it to their own MP. This evidence should also be presented to the Government and to appropriate Parliamentary Committees, as well as reporting it to the representative bodies, if it involves any of their members.

The Inquiry has also exposed how HMRC have data that they could use to clamp down on suspected tax avoidance schemes, but do not currently use it.  The report calls on HMRC to properly link and reconcile the quarterly data of employment intermediaries with the Real Time Information (RTI) submissions in order to quickly detect tax avoidance schemes, then take action to shut them down.

The Inquiry also clearly shows the link between the flawed ‘IR35 legislation’ and the subsequent off-payroll working rules and the operation and use, often unwittingly, of so-called ‘disguised remuneration’. This legislation and the forthcoming roll-out to the private sector has led to the increased proliferation and use of umbrella companies and related arrangements (some of which have then involved so-called ‘disguised remuneration’ schemes).

The Loan Charge APPG is calling on the Government to amend the off-payroll working rules, address these during the passage of this year’s Finance Bill and for the Treasury and HMRC to consider how best to stamp out the abusive practices outlined in this report. Part of this should be legislating that “inside IR35” workers should get full rights under all legislation dealing with agency workers, with a clear and transparent right to holiday and sick pay.

The Loan Charge APPG is calling on the Government to address these issues, as part of the Government’s promised review into supporting self-employment. This review must examine professional contract and freelance working, to come up with the best way of organising, remunerating and taxing this important and increasingly commonplace way of working. This should build on the recommendations in the Taylor Review, but also look at suggestions for different forms of company or tax status for freelance and contract workers, to come up with the best way for this important way of working to be organised.   This must also adopt the principle that it is unfair to have workers who are taxed as employees without having any of the rights or benefits of an employee or any recognition in employment law.  It urges the Government to align tax and employment law, providing certainty for contractors and engagers, and also to ensure that anyone who is taxed as an employee receives the corresponding benefits.

The Loan Charge APPG report concludes by calling on the Government to follow-up the Taylor Review and to examine the best possible ways to organise and structure contracting and freelancing.

The report and its recommendations will be sent to Treasury Ministers, and the APPG is urging the Government to act in the forthcoming Finance Bill, in order to deal with these many issues, including amending the off-payroll rules to stop non-compliant practices by payroll intermediaries.

Commenting, Loan Charge APPG Officers said:

Ruth Cadbury MP, Co-Chair of the Loan Charge APPG (Labour):

“The Loan Charge APPG are pleased to publish our report on ‘How Contracting Should Work’, which builds on previous work looking at self-employment and focuses on the specific issues regarding professional contracting and freelance working. It is clear from our Inquiry that there is significant non-compliance in the worryingly opaque supply chain, which has been dubbed ‘the Wild West’ as a result and the lack of regulation enables exploitative practices, as well as enabling promoters of tax avoidance schemes to operate.

If it is serious about clamping down on tax avoidance schemes, the Government must legislate to clean up the supply chain and proactively stop schemes as they start, rather than merely trying to take retrospective action after the event.  We also call on the Government to commence the review they promised to look at all these issues and how best to recognise and structure contracting and freelancing”.

Baroness Kramer, Vice-Chair of the Loan Charge APPG (Liberal Democrat):

“The Loan Charge APPG report shows the confusion as to how professional contract and freelance workers are supposed to operate. This has been driven to a great extent by the deeply flawed ‘IR35’ legislation and the associated off-payroll working rules.  We urge the Government to finally accept the problems these have caused and the fact that this has led to the proliferation of umbrella companies, which has then opened the door to rogue providers and the mis-selling of tax avoidance schemes. This should happen in the forthcoming Finance Bill, to scrap or at least amend the off-payroll rules to tackle bad practice in the supply chain and to ensure that anyone who is taxed as an employee, receives genuine employee rights and benefits.

We also call on the Government to announce the review into self-employment that they promised, so that rather than constantly penalising contract and freelance workers, we move to a proper system of recognition and structuring of this important way of working, which is increasingly commonplace and important to the economy”.

Owen Thompson MP, Vice-Chair of the Loan Charge APPG (SNP):

“The Loan Charge APPG report exposes very worrying practices in the contracting sector, on the part of some umbrella companies and recruitment agencies. It is clear that this has led directly to dodgy providers entering the market and mis-selling tax avoidance schemes.  As ever, and as with the Loan Charge, it’s the individual contractors, not the promoters of the schemes, who get penalised. The Government needs to act to stamp out schemes as they appear, starting with regulating the sector, to freeze out rogue providers and enforce good practice.

It is also extraordinary that HMRC are already sitting on data that if matched up, would allow them to shut down ‘disguised remuneration’ schemes, but don’t do this. We urge HMRC to do this and to properly work with compliant providers and reputable sector organisations to stop the ongoing mis-selling of tax avoidance schemes which continue to ruin lives”.


Notes to Editors

  1. The ‘How Contracting Should Work’ inquiry commenced in December 2020. The published terms of reference and call for evidence are here.
  2. The Loan Charge All-Party Parliamentary Group (Loan Charge APPG) consists of parliamentarians of all parties from both Houses of Parliament who have concerns about the nature and impact of the ‘2019 Loan Charge’ and about the wider context of fairness of tax legislation and HMRC’s conduct in enforcing it. It currently has 239 members, making it one of the largest APPGs in Parliament. See and Twitter @LoanChargeAPPG. The Loan Charge APPG is an officially registered Parliamentary Group, as described on the UK Parliament website 
  3. The Officers of the Loan Charge APPG are as follows:
  • Ruth Cadbury MP, Co-Chair, MP for Brentford and Isleworth (Labour)
  • Sir Mike Penning MP, Co-Chair, MP for Hemel Hempstead (Conservative)
  • Rt Hon. Sir Ed Davey MP, Co-Chair, MP for Kingston and Surbiton (Liberal Democrat)
  • Hon. Baroness Kramer, Vice-Chair (Liberal Democrat)
  • Rt Hon Sammy Wilson MP, Vice-Chair, MP for East Antrim (DUP)
  • Owen Thompson MP, Vice-Chair, MP for Midlothian (SNP)