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 said this type of behaviour encourages tax avoidance schemes.

The APPG ‘How Contracting Should Work’ Inquiry 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 Loan Charge APPG is calling on the Treasury and HMRC to consider how best to stamp out the “abusive practices” outlined in its report.

Responding to the report, a Government spokesperson said: “Protecting and enhancing workers’ rights through robust regulation – including for those employed by umbrella companies – is a top 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 APPG report said it had uncovered conduct which incentivises non-compliant providers – who because of non-compliance have higher margins – to offer large bonuses to gain access to potential clients.”

The report added: “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.

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

The Government statement added: “The Government has committed to establishing a single enforcement body for employment rights to better protect vulnerable workers and create a level playing-field for the majority of employers complying with the law. Primary legislation will be required to create this new body and so timing will be dependent on the legislative timetable.

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

“This will empower inspectors to investigate complaints involving an umbrella company and take enforcement action where required. This action will focus on situations where agency workers have not received adequate pay and will protect decent employers from unfair competition.

” We have already introduced a requirement to improve the information provided to new agency workers about their contractual terms and pay rates, through a ‘Key Information Document’.

“The Employment Agency Standards Inspectorate (EAS) has published guidance on this requirement, and has been working with business to help them put it into practice. Any agency worker who is concerned that their rights under the relevant regulations have not been upheld should contact EAS. EAS investigates all relevant complaints passed to it, including regarding the requirement to provide a Key Information Document.

“We continue to look at policies to stimulate businesses growth, innovation and job creation – but any policies would not be at the expense of workers’ rights.

” We will bring forward an Employment Bill when Parliamentary time allows.”

The spokesman added HMRC already uses data and other intelligence to identify potential avoidance schemes at an early stage, including umbrellas operating disguised remuneration avoidance schemes.

“We contact taxpayers who our Pay As You Earn Real-Time Information suggested had started to use these schemes. This helps make them aware of the risks of being involved in avoidance, so they can get out of it early before they have built up large tax bills.

“There is no reason for a contractor to use an agency or umbrella company that is not fully compliant with tax law. You do not need to be a tax expert to spot an avoidance scheme – anything that sounds too good to be true almost certainly is.”

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