The Loan Charge All Party Parliamentary Group (APPG) said its report exposes significant non-compliance and malpractice in the supply chain by many umbrella companies and recruitment agencies.

The APPG ‘How Contracting Should Work’ Inquiry has found “significant issues” with the supply chain. It has uncovered evidence of recruitment agencies demanding ‘kickbacks’ or incentives from umbrella companies for being added to a preferred supplier list or recommended to clients. These have including fitted kitchens and holidays for recruitment agency directors, according to the APPG.

The APPG said: “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.”

The report also found what it described as a general lack of transparency over deduction, fees and contractor pay and payments and some recruitment agencies ignoring the legal requirement to provide all workers with a Key Information Document (KID).

The APPG said: “Some umbrella companies appear to be unlawfully deducting employer’s taxes from contractors’ pay.”

The report also found evidence of 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, the APPG said.

“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,” the APPG said.

“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).”

Ruth Cadbury MP, Co-Chair of the Loan Charge APPG (Labour), said: “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), added: “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), said: “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.”

The APPG was set up in 2019 in response to concerns about the loan charge, which was designed to tackle tax avoidance schemes where individuals receive income in the form of loans that are not repaid to avoid income tax.

The Loan Charge APPG is calling on the Treasury and HMRC to consider how best to stamp out the “abusive practices” outlined in its report.