The proposals call on Rishi Sunak to use regulation to halt unethical behaviour in the umbrella sector, which includes the practice of withholding holiday pay, incorrect payment of employers’ national insurance contributions, and abuse of employment allowance tax relief.

Critics claim that this misconduct leads to HMRC and staff being cheated out of billions of pounds. The use of tax avoidance schemes, including the use of so-called ‘mini umbrellas companies’ are estimated to cost workers and HMRC around £1bn annually, the report claims.

Rebecca Seeley Harris, Chair of the Employment Status Forum and James Poyser, CEO of inniAccounts and founder of offpayroll.org.uk, have submitted a draft policy entitled ‘Umbrella companies – Call for Regulation’ to the Treasury and the Department for Business, Energy and Industrial Strategy.

Ms Seeley Harris said the proposals will not only uphold workers’ rights and prevent tax evasion but also protect the reputation of umbrella companies that abide by the law.

She said: “It is paramount that the regulation of this industry is expedited because of the rise in the use of umbrella companies as a result of both the coronavirus pandemic and the off-payroll working rules forcing people through non-compliant umbrellas.”

Mr Poyser said the Government can no longer sit on its hands.

He added: “The breadth and scale of the stories of malpractice, scams and skimming are distressing and deplorable.”

He said: “We have witnessed payslips that don’t reconcile, deductions taken from workers but not paid to HMRC, holiday pay being unfairly pocketed, workers forced to use a single umbrella company with artificially inflated fees and agree to ‘opt-out’ of worker protections. These practices are prolific, including among the most well-known ‘accredited’ umbrella companies.

“Any layperson who lifted the lid on the industry would quickly conclude that this market needs urgent intervention and regulation.”

The policy proposal calls on the Government to appoint a director of labour market enforcement as a matter of urgency to provide strategic direction.

Last month, the Loan Charge All Party Parliamentary Group published a report which exposed what it described as significant malpractice in the supply chain by many umbrella companies and recruitment agencies.

The group warned that 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.

A 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.”

The UK has one of the best workers’ rights records in the world, including generous holiday pay and high standards for workplace safety, the spokesman said.

The spokesman added: “We have updated guidance on mini umbrellas companies (MUCs) fraud, published 10 May, on GOV.UK and will be sharing with stakeholders and advocates, and we will continue to work with trade bodies and other government departments to raise awareness of MUC fraud.

“Our Fraud Investigation Service is using its civil and criminal powers to challenge those who are involved and facilitating mini umbrellas companies fraud, including recently deregistering more than 22,000 mini umbrellas companies who we believe are exploiting the VAT Flat Rate Scheme and removing their access to the Employment Allowance.

“In 2017, HMRC introduced the Trader of Limited Cost Legislation, after seeing a surge in the number of MUCs. This helped to remove a number of businesses setting up MUCs and hence reduced their number.

“The Government has committed to introducing legislation to expand state enforcement for agency workers to cover umbrella companies.”

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