Loathed by many, feared by some, understood by few – Umbrellas, why are they here?

?

The mere mention of “umbrella company” evokes a strong reaction with many people, thoughts of “salary skimming”, “tax avoidance” and “exploitation of workers”.? The government too, does not appear to view them favourably, and called for consultation on compliance and regulation for umbrellas.?? With such poor rankings in the popularity stakes it begs the question: why do umbrella companies exist?

Necessary evil

A client of mine referred to umbrellas as a “necessary evil of contracting”. They are so engrained in the temporary supply chain that their use is almost unavoidable.

They have certainly seen waves of popularity over the years; when the “false self-employment” changes to S44 ITEPA (2003) came into force there was a rise in the uptake or contractors providing services through umbrellas, as self-employment was seen as a risky option.? Then again, with the introduction of Chapter 10 ITEPA (2003) IR35, umbrellas came to the forefront as a “less risky” option for engaging contractors.

If the Supervision, Direction and Control tests of S44 for self-employment can’t be demonstrated, or the IR35 tests for limited companies cannot be met then an umbrella company provides the “safe house” under which PAYE is deducted at source and all parties in the supply chain are afforded protection from the respective pieces of legislation.

Of course, where there is an agency in the supply chain, the agency could engage individuals directly under PAYE, or operate the deemed payment calculation for limited companies. This would require the financial, legal and compliance infrastructure to do so, and of course would carry the general tax compliance risks in the event something went wrong.? Umbrella companies have both the infrastructure and the experience to take away the administrative burdens and tax liabilities agencies would face and provide comfort from tax and employment law issues (an umbrella protection if you will(!)).?

?What’s good for the goose

The appeal for agencies and its clients is seemingly obvious, but what of the individuals?? Is what’s good for the goose also good for the gander?

For a limited company contractor faced with an “inside IR35” decision under Chapter 10, the party in the supply chain paying their company would need to operate the deemed payment calculation which effectively means PAYE is operated on all payments made to the company.? The contractor doesn’t receive any special “status” for employment law purposes -they are not an employee but simply taxed as one.? Albeit they may fall within AWR and be granted some protections.

For the self-employed individual who cannot be paid self-employed due to S44, if they were to be engaged by the agency, they would be subject to PAYE by the agency and would also be afforded some protections as an agency worker (right to NMW, HP etc), including under the agency workers regulations giving rights from week 1 and enhanced rights at week 12).

So why would an individual want to go to through an umbrella?? For the limited company contractor, AWR aside, opting to be employed by an umbrella company provides an individual automatic rights and protections that simply do not exist otherwise (a deemed employee for tax does not give deemed employment law rights).

For the agency worker, perhaps opting to be employed via an umbrella company is not such an obvious choice, however all statuses are not equal.? Employees, compared to agency workers, have enhanced rights including right to claim redundancy and unfair dismissal.?

Also, employment can provide security for the purposes of personal finance for many individuals the idea of being an employee, with tax and NI obligations dealt with at source, gives them a sense of stability and peace of mind that they cannot achieve by other contracting options.

Square pegs, round holes

So, if there are benefits for the individuals, protection for the agencies and clients then why all the disdain for umbrellas??

One of the possibilities is that square pegs simply do not fit into round holes. Quite simply umbrella companies are not suitable for all individuals.

Some people simply do not want to be employed by an umbrella as they feel they have more flexibility and freedom as an agency worker or remaining in their limited company (even if subject to deemed payment).

Some don’t want to commit to umbrella employment as they are working until they find a contract where they can be self-employed/outside IR35.?

Some people earn too much or too little to get any real benefit of being employed by an umbrella company.

Some people simply just don’t care about employment protections and just don’t want to be employed by an umbrella.

We all have different views on what we want, how we want to live and how we want to work – one size does not fit all and that is true of umbrella companies.? They are not a suitable “dumping ground” for everyone who can’t contract as self-employed or outside of IR35.

No level playing field

Another reason for the dislike is that there is a definite imbalance in how each umbrella company operates. It is definitely not a level playing field across the industry.? Umbrella companies themselves have been calling out for regulation in the industry, and after years of shouting there is now a government consultation.

But no two companies are alike in how they operate and not every business has a keen eye on tax and legal compliance.? No one can expect that every umbrella company in the country is going to be 100% compliant.? You don’t hear news stories of the compliant companies, the news that draws in the masses is that of the shocking or scandalous – and quite rightly everyone has heard of the “salary skimming” umbrellas and the “exploited umbrella workers”, no one has heard of “Joe Bloggs” umbrella who has quietly been operating compliantly for many years, paying its taxes on time and complying with its employment obligations.? They do exist, and I am happy to say I have worked with a great many of them – and they are not as rare as you might think...?

Sifting for gold

For agencies and individuals finding an umbrella company takes time and effort, and, yes, it can seem like you are sifting for gold.? While undoubtedly individuals and agencies have different priorities, they are not competing interests.? A truly complaint and “decent” company is compliant and decent for both its clients and its employees.

So, what should you look for in an umbrella??

I would suggest you want the same thing from your umbrella as you would want from your accountant – someone who knows what they are doing and can explain it to you in a way that you understand.? Transparency is great, but only if you know what you are looking at!

You don’t need to be a tax expert (though admittedly it would not hurt!), just go back to the basics; the boring but necessary fundamentals.? Integration with client systems, online portals etc. are all brilliant and convenient tools, but they afford little to no benefit to either agency or individual if they are founded on incorrect compliance/set up.

An umbrella company should be able to provide you with core basic information, such as:

• Establishing the individual is an employee, what this means, the rights associated for individuals and providing the individual with an employment contract.
• A sample payslip and calculation that explains to employees and agencies how pay is calculated.
• How statutory payments work such as holiday pay, sick pay, maternity pay etc.
• How the umbrella itself earns its money.
• ·Payment process.
• Right to work checks.
• How it sits in the contractual chain.
• Its responsibilities and obligations as an employer.

This is not a definitive list, and many readers will undoubtedly have their own “tell-tale” questions to ask of umbrellas.? But the key here is, go back to basics, ask the questions.

Items not included above (because they would suggest it is not an umbrella as we know it) would be promise of 90% take home pay, use of loan schemes, mini umbrellas with offshore directors – those would be flags that we are not in umbrella territory anymore!

For agencies, and individuals, the recruitment industry is fast-paced; clients need people yesterday and it is not always convenient to scrutinise every last detail. Indeed, most of us simply just “agree” to update terms on app, or consent to cookies without reading.? If you do not take the time, however, you may not like the outcome.? Tax and legal obligation issues have a tendency of spilling over to other parties, and you do not want to end up on the wrong end of a challenge.

Bare bones

Knowing what an umbrella company is (and is not) and how it should operate is key to understanding whether an umbrella company is the right choice and whether it is operating compliantly.? The good ones will be able to explain this is detail.? It is though, I think, beneficial to be clear what a standard umbrella company is and how it should function.

The term umbrella is often used as a catch-all label covering a multitude of different operating structures – but at its core every umbrella should operate in fundamentally the same way.? The bare bones of umbrella operation.

An umbrella company is not a payroll company, it is not a self-employed contractor, it is not a managed service company provider - it is an employer.?

As an employer the umbrella company employs individuals under a contract of employment, it will have to comply with employment law – the same employment laws applicable to all employers.? Part of those obligations include ensuring NMW, HP etc. is complied with.

The umbrella must also operate PAYE on its employee’s and pay the money to HMRC.? It also has an obligation to operate a pension scheme for all employees who don’t opt out, including making contributions.? If it is a large employer, it will need to pay apprenticeship levy.? All employers must also pay Employer’s National Insurance to HMRC.

An umbrella, being an employer, must pay all of theses legal obligations.?

The umbrella will also need insurances: most commonly employers liability insurance, public liability, professional indemnity.? It must pay statutory sick pay and statutory maternity pay/paternity pay (none of which it can claim back).

The umbrella company will need staff.? Payroll, admin, sales, managers etc.? It will also need an accountant, and most likely an employment specialist and a tax specialist.

The umbrella company’s ONLY source of income is the amount of money it receives for the services it provides to its clients.? It can only provide those services to clients if it has employees.? The umbrella receives no other income, handouts or special compensation from other sources.

The commercial presence of the umbrella company is that it enters into contract with an agency or client for the provision of services.? Those services will be commercial services i.e. construction services, driving services, IT services etc.? The agency will agree a rate of pay with the umbrella company.? That is the umbrella company’s charge out rate.

From that amount received from the agency, the umbrella company must fund ALL of the above obligations and costs.?

In the same way that any client-facing employer agrees contracts with its clients, the client pays the company what the company’s charge out rate is. ??That company will not pay out everything it has received from the client to their employees – the company would go bust if it did this!? All employers need to retain money to operate and try to make a profit.

The only difference with an umbrella company is that it operates this on an individual employee basis.? For each service provision for each employee, it operates a separate and distinct “pot” of funds.? From the money the umbrella has received it will retain a small margin (to cover overheads) it will then need to pay HMRC ERNI and apprenticeship levy from this pot of money.? Usually, an umbrella will calculate NMW for every hour worked plus holiday pay to ensure employees are protected.? It will then look at any eligible employee expenses (if applicable) it can reimburse from this pot of funds, and if there are funds remaining it will distribute these to the employee as salary (again accounting for Employer’s NI etc).? The umbrella company physically cannot pay out and cover its own costs from any other source, other than the pot of funds it has received.

Outside of this umbrella companies will have different variations of how they attract business, specialist industries etc. but the bare bones of operation will be the same.

A place for everything

While the umbrella market is fraught with non-compliance and those who do not operate genuinely, this is true of all industries across all sectors – it isn’t isolated to “umbrella world”.? Is there a need for regulation?? Probably yes, provided that regulation is enforced by HMRC and appropriate bodies with official legal standing.? But does this mean umbrella companies are inherently “bad”? Absolutely not.?

If operated correctly? they can have? positive impact assist businesses in creating a more agile and adaptable workforce which mutuality benefits both individual and engager.

Whatever happens with government consultations or changes with legislation, umbrellas are engrained in the contracting world, and work well for a great many.? For now, the key to getting the best umbrella service is to make sure you carry out you own diligent research and evaluation to find a company that meets all your requirements.????

?

?

?

?

?? ?

?

?