The clamber to clean up umbrella companies didn’t start since Money Box
A new online platform by a brolly so recruiters and clients can check that both payroll and tax are all in order.
A compliance team more au fait with representing taxpayers in HMRC disputes than the ‘nuts and bolts’ of a brolly being invited in to audit an umbrella’s entire activities.
And thirdly, a chunky report on Labour Market intermediaries, exploring the “benefits and complexities” of umbrella companies ahead of an ‘expected shift’ away from PSCs to brollies, the report says, due to IR35 reform next Tuesday,
The wheels of all three of these umbrella sector compliance developments were no doubt set in motion before the BBC’s Money Box spotlighted the seemingly appalling instance of a single brolly apparently holding back the holiday pay of its contractors, writes former tax inspector Carolyn Walsh, director of both Andraste Accounting & CWC Solutions.
Looks can be deceiving
But the trio actually emerged after the Radio 4 programme, probably giving the most casual of onlookers the impression that all three were reactions to the apparent wrongdoing. If it weren’t for their motioning wheels predating the probe, they very well could have been.
Please note, I say ‘apparent,’ above, intentionally because it is interesting that no party has so far been willing to disclose the identity of the offending umbrella (an FCSA member according to the programme), so that the firm can be properly investigated.
On a personal level, I was horrified to hear my radio on March 20th telling me that an umbrella company had used its employment contract, and standard ones do provide for holiday pay to not be carried over, to withhold part of the amount it has received from an agency.
Expulsion, or the hot coals treatment if not
The question being asked is; how can an umbrella company hold money back that it has received in respect of a worker? The answer is -- it absolutely should not. If there are umbrella companies that were holding back holiday pay this way – let alone pocketing it for themselves, then they need to be thrown out of the FCSA. And if they are not a Freelancer & Contractor Service Association member, they still need to be hauled over the coals.
In the report I referred to at the outset, which is authored by the LITRG, there is a section entitled ‘Holiday Pay Issues’ (p59). It’s well worth a read for anyone who wants to know the facts in this contentious area. There is even an acknowledgement of the very problem that ‘Steve’, the contractor who featured on Money Box, reportedly endured.
Where Steve probably got it wrong
But I would disagree with his assertion on-air that holiday pay abuses by umbrella companies are widespread. At my own umbrella company, we calculate holiday pay entitlement to a holiday year-end and discuss with contractors how to manage unpaid holidays. We do this with all the umbrella’s employees, whether they are direct paid staff or employed under an umbrella contract of employment.
Giving umbrella workers options over the holiday pay, and discussing what suits them when it comes to paid leave, is in line with the Matthew Taylor Good Work report. The LITRG report helpfully highlights Sir Matthew saying that individuals should have “greater choice” over the method by which they receive their paid leave. ContractorUK readers might also like to know that the LITRG report features them too, as it refers to threads on the ContractorUK Forum, in particular, ‘My first payslip with IR35 and I don’t get it!’
Rolling model has protection (not tax efficiency) in-built
It might further interest contractors to know that, at the time of writing, the vast majority of them who are registered with umbrella companies choose to have their holiday pay entitlement paid on a rolling week-by-week basis. This is the trend of the day and the report correctly observes that how holiday pay gets paid out by umbrellas has fluctuated in recent years. But contractors should note – their currently preferred holiday pay model (receiving it on a weekly rolling basis), is not the most tax-efficient way of drawing it. Nonetheless, it is a choice that’s available, and it’s redeeming feature has to be that it means the situation ‘Steve’ found himself in would simply not arise. This is another reason why I don’t believe the abusive withholding of holiday pay is widespread.
Muddying the waters on the radio programme and since it aired actually, are clunky explanations. Again, I’d recommend the LITRG report to avoid those. But in short, umbrella companies are employers for tax purposes and are governed by the same employment laws as any employer. So, as happens when any employer unlawfully withholds any amount from an employee’s pay, an employee can make a claim to the Employment Tribunal, which – where there have been such abuses -- will find in the employee’s favour.
The KIDs aren't alright -- if we actually want them issued
Elsewhere on the BBC programme, it was said that more than eight in 10 contractors have not received a Key Information Document. Whether it’s a robust finding or not (and I’m not convinced it is), I would say that a high rate of non-compliance with KID may be because some agencies are, wrongly in my view, treating the Umbrella Pay Reconciliation Statement provided by umbrella companies as a Key Information Document.
Personally, I believe that the current pay reconciliation statement used by most umbrella companies could be split into two documents, one representing the KID and being provided to the agency to give to agency workers, and the other being a simple payslip illustration.
The compliance clamber
While that sounds simple enough, it’s not surprising to me that as I mentioned in the introduction, compliance concerns have compelled one umbrella to opt for an audit from tax dispute specialists. It’s further unsurprising that we’ve got compliance platform popping up too, to try to protect against risk under the April 6th off-payroll rules by allowing parties to check payroll providers have done their duties. (N.B. HMRC provides taxpayers with an online personal tax account, which allows workers to check the income and tax/NI being reported under RTI by their umbrella company. This is already accessible now and is free of charge). Furthermore, only last week, a loan scheme masquerading as an umbrella company was doing the email rounds, preying on contractors concerned about earning less due to IR35 reform, prompting compliance alerts by myself and others.
Finally contractors, remember...
But solely from a contractor standpoint, the long and short of it all is this. An umbrella company is an employment intermediary in the labour supply chain, but as long as the company is a genuine umbrella, and is acting in compliance with both tax and employment laws, you as its employee have the same right to recourse as any other employees, if your rights, protections and benefits aren’t properly met, honoured and received.