Contractors, IR35 and the EAS will bring KIDs into their own

They may be the subject of a two-year-old this month HMRC ‘Spotlight’ publication, but umbrella companies are a fact of life for many contractors today, writes former tax inspector Carolyn Walsh, the managing director of Andraste Accounting.

While they might not always be the most positive of realities (although it should be noted that there are some very good brollies operating right now, totally compliantly), proposed reform of IR35 from April 6th 2021 means that umbrellas are not going to suddenly fold. On the contrary, they’ll likely actually expand.

This expansion is because the reform will make limited companies less attractive. And by that, I mean less attractive both logistically (some clients will ban PSCs outright) and financially, (the reform threatens to dent take-home pay for many PSC owners).

Cherished, protected, enshrined

So in this covidian age, where every positive not only counts, but where it must also be cherished and protected, it’s welcome that enshrined now in employment legislation is wording to align an umbrella company worker’s pay rate with the pay rate offered by the agency and the hirer.

This change, part of the new Key Information Document and triggered by a recent tweak to regulations dating back to 2003, has the positive impact of now providing much-needed transparency to workers who want to see what they’re pocketing. That’s going to be even more important in the future because many of the PSCs who convert from (or supplement their usage of) the limited company structure will likely be totally new to umbrellas, and not au fait with how they operate. So ‘KIDs’ might soon have a vocal driver – workers wanting to be ‘in the know’ about their pay.

For those completely new to brollies, a sometimes helpful way to regard them in your mind is this: umbrellas are ordinary limited companies but they take the place in the labour supply chain of the contractors who run their own PSCs. And as a follow-up thought, remember this -- they’re popular where IR35 applies or would apply and/or where an end-customer or a recruitment agency (or a PSC themselves), believes that a PSC is not worth the hassle, responsibility, or risk.

Autumn Budget 2020 could be the starting pistol

For all these contractual parties, it’s worth noting that the government says that legislation to bring umbrella companies within the remit of the Employment Agency Standards (EAS) Inspectorate is going to be introduced “as soon as the parliamentary timetable allows.” That could mean brollies are potentially regulated against from this autumn’s Budget 2020. Or perhaps the March 2021 Spring Statement would be more fitting, given that the update falls on the eve of when the IR35 reforms bite.

Five teams at HMRC are (according to Matthew Taylor last month),“looking closely at developing expertise in dealing with umbrella bodies and intermediaries.” Writing as Labour Market Enforcement Director in an update now available but which was delayed due to covid, Taylor says that he knows business department officials are working with EAS and HMRC to “develop options to regulate umbrella companies once EAS has the requisite powers”.

All of this was mooted a few years ago, and even then it was not before time. Generally-speaking, where an umbrella company acts as an employment intermediary, and acts within all the guidelines, it should fall within the EAS’s remit. Again, for contract workers, this has to represent another step in the right direction.

KID should do some good, but isn't (yet)

Less positively, because they are seemingly being ignored in the contractor sector, is what Taylor then rightly says in his update should do some good -- Key Information Documents. We don’t know how many agencies and umbrella companies are actually complying with the KID requirement, which was brought into force on April 6th 2020 by an amendment to the 2003 Agency Conduct Regs. But my hunch is not very many, at least not as far as I am hearing right now – some four months since they were introduced.

Unfortunately, and maybe because they are working on the future ‘big picture’ regulation of umbrella companies, there’s no signs of officials at the Department for Business, Energy and Industrial Strategy doing all that much to get KIDs out there. Due to covid, I do know that BEIS officials have been working from home since KIDs became law, so maybe that partly explains the lack of follow-through.

No room for passing-off is coming

But this amendment really is important because it brings transparency to pay rates, especially when an agency worker is paid via an umbrella company, as the ‘true’ pay rate must now be offered and spelt out (in the KID), with no room any more for the enhanced, better-looking umbrella or limited company pay rate to be ‘passed off’ as the worker's pay rate. In the fast-approaching post-pandemic world, being taking for a ride by our contractual partners, in relation to how much we get paid just for doing our job, isn’t going to wash.

Getting KIDs in place will help quash the biggest bugbear for workers paid via an umbrella company --  believing (because they were probably told so) that the umbrella pay rate is their ‘true’ pay rate, only then to mistakenly think that the umbrella has deducted its costs from what they perceive to be their fee! Regulation to back up and enforce previous regulation sounds strict, like overkill even. But the inclusion of umbrella companies under the EAS looks like a much-needed development and soon another reality, to ensure that compliance with all the conduct regulations – including the important new KID rule -- is observed and if necessary, enforced.

Profile picture for user Carolyn Walsh

Written by Carolyn Walsh

With over twenty years’ experience in the sector, Carolyn assists freelancers, contractors, agency and umbrella company workers, interpreting tax legislation and guidance with a no-nonsense approach.
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