Hidden cost of umbrella companies in UK ‘may top £4.5bn a year’

Unions and tax experts call for greater regulation as those affected thought to exceed 600,000 workers

Union and employment experts have called on the government to step up regulation of the temporary labour market, amid concerns abuses by “umbrella” companies may be costing workers and the exchequer as much as £4.5bn a year.

As many as 600,000 temporary workers in the UK are thought to be employed by umbrella companies, used by recruitment agencies and companies to cut temporary payroll costs.

In some cases they can provide useful services for contractors, but industry experts and the Trades Union Congress (TUC) fear they are increasingly being used to diminish workers’ rights and misappropriate billions of pounds in unpaid wages and tax fraud.

“Umbrellas need specific legislation,” said Rebecca Seeley Harris, a tax expert and former Treasury adviser. “It’s rife with problems and I can’t believe the government has sat on its hands and not pursued it.”

Umbrella companies are coming under increased scrutiny as more people are forced to use them following new, stricter tax rules for contractors. There has also been more recent scrutiny of “mini-umbrella companies”, used to avoid tax potentially worth hundreds of millions of pounds a year. A Guardian investigation last week showed that mini-umbrella schemes appeared to be present in several suppliers to the government’s pandemic test-and-trace system.

The UK’s former director of labour market enforcement, an official tasked with coordinating the efforts of the various agencies overseeing workers’ rights, in 2018 cited estimates of a £4.5bn cost, including £1bn from unpaid wages, and £1bn from frauds including mini-umbrella companies.

The other crucial issue is holiday pay, a legal requirement. Umbrella companies have been estimated to withhold holiday pay worth £2.5bn a year. Holiday pay is forfeited if workers do not actively claim it before the end of a tax year – meaning unscrupulous umbrellas can pocket it rather than paying it to workers. There is no organisation in charge of recovering unpaid holiday pay for workers.

Seeley Harris, who chairs the Employment Status Forum, has written to ministers Jesse Norman and Paul Scully calling for urgent action, including the immediate appointment of a new director of labour market enforcement, a role that has been empty since the start of the year.

She wrote that the government must push ahead if it plans to create a single enforcement body for employment law, as promised in the 2019 Conservative manifesto.

Frances O’Grady, the TUC’s general secretary, said: “Everyone deserves decent work. But a lack of regulation is allowing dodgy umbrella companies to operate with impunity. The victims are often low-paid key workers, denied their basic rights like holiday pay and minimum wage.

“Ministers must consider whether umbrella companies should be allowed at all. Employers shouldn’t be able to farm out their duties to a long line of intermediaries – washing their hands of any responsibility.”

The TUC has also raised concerns about declining enforcement of labour market laws. Inspections of employers by HM Revenue and Customs, responsible for policing minimum wage laws, and the Employment Agency Standards Inspectorate (EASI) fell by 20% and 50%, respectively, during 2020 compared with 2019.

The TUC said that basic workers’ rights are “illusory” if not backed up by proper enforcement, and that more resources are needed. For instance, 40,000 employment agencies are covered by only 19 EASI inspectors.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

Andy Chamberlain, director of policy at IPSE, the Association of Independent Professionals and the Self-Employed, said regulation of umbrella companies was “long overdue” and added that the “recent controversy over mini-umbrellas is the tip of the iceberg”.

He added that government action was urgent because the new rules for contractors had “pushed yet more individuals into the wild west of the umbrella market”.

A UK government spokesperson said: “Protecting and enhancing workers’ rights through robust regulation – 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, and have committed to establishing a single enforcement body to further protect vulnerable workers.”


Jasper Jolly

The GuardianTramp

Related Content

Article image
TUC seeks changes to draft law to help seafarers after P&O Ferries scandal
Sacking of nearly 800 crew in favour of low-paid agency workers in March led to calls for loopholes to be closed in seafarers’ wages bill

Gwyn Topham Transport correspondent

11, Dec, 2022 @3:30 PM

Article image
Treasury loses £40bn each year on hidden sales, tax campaigner claims
It would make scale of tax evasion from sales going unreported to HMRC nearly four times larger than official figures suggest

Simon Bowers

19, May, 2014 @11:01 PM

Article image
NHS Covid lab staff hired via pay scheme with tax scam hallmarks
Revealed: Hundreds of workers recruited for Milton Keynes lab were employed by multiple mini companies

Simon Goodley and Jasper Jolly

11, May, 2021 @12:00 PM

Article image
Government plans let ‘dodgy umbrella companies off the hook’, warns TUC
Trades Union Congress renews calls for ban on umbrella firms to address labour market abuses

Jasper Jolly

14, Mar, 2022 @7:00 AM

Article image
Extra 1.3m workers on universal credit since pandemic began, research finds
Unions call for increase in minimum wage and benefits to offset array of rising costs

Miles Brignall

07, Feb, 2022 @6:00 AM

Article image
Labour plans clampdown on 'sweetheart deals' to close £36bn tax gap
Party to ‘pour the disinfectant of sunlight’ on multinationals’ accounts by forcing big companies to publish full tax returns

Rupert Neate

14, Apr, 2017 @11:01 PM

Article image
HMRC under fire over tax-dodging disclosure deadline
HMRC wants repayment for losses of more than £25,000 to be sanctioned in advance, rather than taxpayers adjusting tax returns.

Dan Milmo

24, Jul, 2011 @5:24 PM

Article image
Delaying new law ‘gives green light to rogue employers’, says TUC
With employment bill unlikely to make Queen’s speech, P&O Ferries-type scandals will happen again, says Frances O’Grady

Jasper Jolly

03, Apr, 2022 @11:01 PM

Article image
Ports and unions criticise Shapps’ plan for law on seafarers’ minimum wage
Legislation announced in Queen’s Speech in response to P&O Ferries’ sacking of 800 crew

Gwyn Topham Transport correspondent

10, May, 2022 @1:59 PM

Article image
HMRC gets tough on persistent tax evaders
Initiative targets 900 of the worst offenders, telling them they are 'on probation', subject to tax spot checks and risk being named

Alex Hawkes

22, Feb, 2011 @7:26 PM