A new report has been released by the Loan Charge All-Party Parliamentary Group (APPG) that has revealed “significant” non-compliance in the supply chain and urged the Government to review and revise IR35 reform.

The inquiry into How Contracting Should Work has found that reform of the IR35 rules has “led to the increased proliferation of umbrella companies” that are “all too often exploiting contractors”.

Following months of investigations, the inquiry found that some contractors have been recommended to work through certain umbrella companies, which have led them to use disguised remuneration schemes, often without being made aware of what they are agreeing to.

The reforms have also created a “take it or leave it” situation where contracted workers are being forced to use a specific umbrella company to secure work.

The APPG found that there was a “general lack of transparency” over fees and deductions, with some umbrella companies “unlawfully deducting employer’s taxes from contractors’ pay”, while others had withheld holiday pay from contractors who were unaware they were entitled to this benefit.

The report concluded that the “unregulated umbrella market is out-of-control” and is one of the “key reasons for tax avoidance schemes operating”.

“It is clear 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),” the report stated.

In response to it’s findings, the APPG is now calling on the Government to take steps to address these issues as part of its promised review into supporting self-employment and contracting.

It says that legislation should be introduced that prevents umbrella companies:

• Receiving financial incentives
• Withholding holiday pay
• Forcing or coercing contractors to opt out of the Conduct of Employment Regulations.

The APPG has also suggested making it mandatory for agencies to disclose all fees and costs and explain deductions in documents and on payslips.

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