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When is an umbrella not an umbrella?

by Jackson B

The roll-out of the IR35 reforms that came into effect in the public sector in 2017 and more recently in the private sector in April 2021 has seen many contractors being forced to review their working options and has led to a proliferation in the number of contractors being required to work through an umbrella firm.   It has also led to a surge in malpractice and a rise in the numbers of providers masquerading as umbrella firms when they are in fact ‘have I got a good idea for you’ schemes and best avoided.  Today, it has never been more important that contractors, recruiters and hirers throughout the supply chain understand some of the warning signs and what to avoid when looking at the providers in the market.  Some may not be all they purport to be.

Crawford Temple is CEO and founder of Professional Passport, the largest independent assessor of payment intermediary compliance and here he outlines the importance of looking carefully at the credentials of a provider.

The term Umbrella is not defined in legislation and therefore is often used as a generic term that describes a wide range of different offerings, many of which we would not identify as an umbrella company.  

All umbrella companies are subject to the same tax rules and therefore should all provide remarkably similar returns to the workers, the only difference being the margin charge. This should only make a few pence difference to the take home pay.

What would Professional Passport recognise as an Umbrella Company

An umbrella company is a limited company that employs their workers through a formal employment contract and applies PAYE tax on all their income, as any normal employer would.

What Professional Passport would NOT recognise as an Umbrella Company

It is as important, if not more so, to understand and recognise what is not an umbrella company as these service offerings come with high risks through the whole supply chain. There are many variations of offerings that describe themselves as an Umbrella Company that we would not see as such. These tend to fall in to our ‘Have I got a good idea for you’ category and hold varying degrees of risk to both workers and the supply chain. 

These are some of the common variations we see in the market today:

Mini Umbrella Company

The BBC recently reported that more than 40,000 people from the Philippines have been recruited to front British companies as part of schemes costing the UK “hundreds of millions of pounds” in lost taxes. BBC Radio 4’s File on 4 discovered more than 48,000 Mini Umbrella Companies (MUCs) have been created in the past five years.  On the surface a MUC could look like a ‘normal’ umbrella with the recruitment company paying all monies in to a single bank account for all their workers. Evidence provided on contracts and payslips may also look like a ‘normal’ umbrella. Often these arrangements are run with very low fees applying.

The difference is that behind the scenes there are an array of small companies typically employing only a few workers. They use this structure to claim the employment relief on employers National Insurance and, in some cases, utilise the Flat Rate VAT Scheme.

That being the case any unpaid liabilities following enforcement action could be passed back up the supply chain.

HMRC has recently issued some guidance on how to spot a MUC so is aware of these schemes but there has been no visible enforcement in clamping down on such schemes and the explosion of these schemes has been fuelled by the introduction of the Off-Payroll working rules. 

Elective Deduction Model

In this arrangement the worker is ‘self-employed’ but voluntarily pays PAYE tax. The reason for this is to escape the ‘self-employed’ tests in the Employment Intermediaries Legislation.

Whilst it would appear that all tax is paid and therefore presented as very low risk we do not believe this to be the case.

These arrangements tend to be offered to lower paid workers as they argue that holiday pay is not required as the worker is self-employed. In some extreme cases we have seen arguments that National Minimum Wage does not apply.

If a case was brought through an employment tribunal, we believe that it would be highly unlikely that the tribunal would agree the worker’s self-employed status and where this happened, significant liabilities would result. One case successfully challenged could result in the whole arrangement collapsing with vast liabilities across all workers.

Sub-Contracting to Personal Service Companies (PSCs)

This was a model we saw emerge when Off-Payroll Working Legislation was introduced into the Public Sector. In simple terms the provider seeks to challenge the status determination assessment as not being carried out using reasonable care. They then carry out a new assessment, which in many cases delivers an outside IR35 outcome. They rely on this to then pay gross funds to the workers PSC.

With the liability chain changed in the legislation that comes in from April 2021 this represents a significant risk of liabilities throughout the supply chain.

In many cases the recruitment company may not be aware that the ‘umbrella’ is sub-contracting to a PSC and paying gross funds as the monies would be paid into the umbrella’s bank account.

Disguised Remuneration – typically using loans or advances

This area has the widest range of offerings, but all share a common aspect in that not all of the income is being taxed and/or reported. In some extreme examples, we believe the arrangement could be determined as fraudulent as the payslips provided appear correct but the RTI returns will be submitted with completely different income profiles.

These arrangements can be the hardest to detect and there appears to be many workers attracted to the high returns offered.

What additional checks should the supply chain carry out to verify ongoing compliance

We would always suggest that sampling of payslips and matching to remittances should be carried out to highlight any potential issues. 

 A further clue for a recruitment company would be where a certain provider suddenly gains traction for no apparent reason.  We also suggest that end clients obtain a list of the companies used by their workers so they too can identify any anomalies.

Whilst this is a useful check it will not pick up everything and it would be advisable for contractors to register with HMRC for their personal tax account. This allows workers to check that the income being reported to HMRC matches what they are receiving.

Preferred Supplier and Approved Supplier Listings

Many supply chains operate with both a preferred supplier list [PSL] and an approved supplier list [ASL].

A preferred supplier list is typically a short list of providers that are promoted to contractors who currently have no relationship with a provider.

The approved supplier list is a much more comprehensive list of providers that would be accepted where a worker has an existing relationship in place.

We would always suggest that all providers should have a compliance accreditation before being allowed on any list but the ASL should have as broad a range as possible. Contractors gain rights with their employment, as well as building a continuity of employment, when operating through a single provider, forcing regular change undermines some of the benefits of the umbrella to the worker.

Compliant umbrella firms offer a legitimate contractor management solution that gives individuals all the benefits of employment whilst working on a variety of assignments.  Good umbrella firms are open and transparent in their dealings with workers and provide a clear contract of employment along with all the rights and benefits that come with employment.  Umbrella working will undoubtedly become increasingly popular in the months ahead so heed the warning signs and be sure that all parties in the supply chain are attached to an umbrella firm that has been fully accredited and approved

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