Implications of Umbrella Companies for Tax Administration

Abstract

Umbrella companies play an increasingly important role in the U.K. labour market. They permit employment businesses (temporary work agencies) to outsource their pay, employment rights, and tax functions to them (albeit at a cost to the agency and, often, the worker). It appears that the recent rapid expansion in the number of umbrella companies has created a concerning number of non-compliant operators. Two forms of tax non-compliance are observed:

• tax evasion, through the use of mini-umbrella companies (MUCs)2; and
• tax avoidance, through the use of disguised remuneration (DR) schemes.

In response, the government needs to take action to protect the rights of workers and protect exchequer revenues. This note focuses on these behaviours but also comments briefly on the role of umbrella companies and the information that should be conveyed to workers.