The outlook for umbrella companies is unclear

The future for PAYE umbrella companies and liabilities for those who use them are unclear with policymakers weighing up how to regulate their use in the labour market.

The government issued a call for evidence on the market between November and February, which it said would complement its commitment to bring umbrella companies into scope for regulation and enforcement.

Officials have already warned the government will intervene where there is evidence of poor compliance with employment rights and tax obligations. The government is expected to publish its summary of responses in the coming months.

Ian Anfield, managing director of Hudson Contract, said: “There is plenty of evidence that many umbrella companies are getting it wrong when it comes to tax and employment law. Sometimes this is simply down to incompetence or when the architects of schemes push aggressive tax management too far. However it is also clear there is deliberate and obvious fraud and the involvement of organized crime.

“Not so much in construction, but in industries such as banking and IT, the introduction of new off-payroll working rules known as IR35 has pushed many thousands of limited company contractors into PAYE umbrella schemes, often in a hurry with little choice for the individual. IR35 has therefore solved one problem but created lots of others so HMRC and the government will be forced to act.

"It looks from the language used that government will be expecting firms to police compliance within their supply chains and will be holding them to account. For construction firms, umbrellas may creep in around labour supply agencies, with whom the use of umbrella schemes is fairly common. To help deal with this and existing legislation, Hudson offers all clients due diligence supply chain checks, which are proven to avoid lengthy enquiries and nasty surprises later."