Why our technical report on umbrella companies is a warning to contractors
Umbrella companies were in the spotlight by MPs just a few days ago, but our own 140-plus page report into umbrellas could really help contractors who are having to grapple with working through a brolly post-April 6th 2021, writes Meredith McCammond, technical officer at the Low Incomes Tax Reform Group.
Our report on intermediaries: explainer for contractors
Part of the Chartered Institute of Taxation, the report by us at the LITRG is factual, in that it does not seek to draw conclusions or make recommendations.
Instead, we put together evidence from a range of sources, to help form an overall picture of the current umbrella marketplace. Given that many people think umbrella companies exist only to exploit the tax system and lower paid workers, we hope the report will be a useful contribution to the debate about umbrella companies.
Entitled ‘Labour Market Intermediaries: a technical report outlining how umbrella companies and other intermediaries operate in the labour market and the implications for workers who use them,' the report is available for anyone to read online.
Navigate yourself through the world of brolly working
But here, exclusively for ContractorUK, I will outline and pinpoint those sections of the report which could actually assist contractors by informing them, protecting them and ultimately helping them to navigate through the world of umbrella company working.
So following the April 6th 2021 introduction of the new off-payroll rules, here are the areas that IR35 reform-affected contractors moving to umbrellas ought to consider, with the report chapters listed for your reference. Your nine ‘need-to-dos’ are as follows:
1. Sniff out if it’s DR in disguise
You need to be extra vigilant about being offered or given part of your payment/earnings in the form of loans, grants, advances. Even if it has a ‘QC’s opinion’ or appears to have been ‘approved’ by HMRC. These aspects all smack of Disguised Remuneration and it doesn’t tend to end well for workers. (Chapter 11).
2. Make sure it is NOT a ‘mini-umbrella’
On the face of it, all is well under this model as you will be having PAYE operated. However, in the background, you will be put into ‘mini companies,’ where the Employment Allowance (EA) is being claimed inappropriately. The key giveaway is that your payslip will have different PAYE references – as much as every week – with obvious impacts to the exchequer but also to you – as you will never be with any one employer long enough to accrue any rights, and you will have an unusual and fragmented employment record, which could impact on you in many ways. (Chapter 10)
3. Check what happens on holiday pay
Make sure your holiday pay is calculated on all elements of gross taxable pay. Also check how the umbrella company will deal with your holiday pay – if it is not on a ‘rolled up’ basis be clear as to the circumstances in which you may lose the holiday pay. For example, if you do not request your holiday pay before the end of the holiday year, do you lose it? And what if you leave the umbrella? Ask them to confirm that all outstanding holiday pay will be paid to you with your final payment. (Chapter 5)
4. Know your rates
Be clear on what rate your agency is quoting you to work through an umbrella – is it the ‘PAYE rate’ (the rate they would pay you if you worked through them), or is it the ‘uplifted rate’ (that is, the PAYE rate plus all the on top employment costs). It should be the latter. (Chapter 5)
5. Be comfortable on their expenses grounds
If the umbrella is offering to process expenses for you via the payroll, be clear and comfortable as to the grounds on which they are doing this. If they are home to work travel expenses, is it because you are outside of the ‘Supervision, Direction or Control’ test? Is it because the expenses are rechargeable expenses? (Chapter 3 and 4)
6. Push back on kick-backs (and badges)
You should be aware that some agencies are incentivised by a commission into encouraging you to join up to certain umbrella companies. Ideally, don’t just go with an umbrella company because it is on your agencies’ Preferred Supplier List, or just because it has certain accreditations! Make sure you do your own research as to which umbrella company is right for you. (Chapter 7)
7. Scrutinise the small print
Different umbrella companies will advertise different ‘perks’, sometimes at a cost. Some of these may be worth very little, e.g. same day bank transfers (which are pretty standard these days), or may not be relevant to you, so you should weigh things up carefully before choosing an umbrella. (Chapter 4)
8. Know if it’s a nest egg enticer
Check out what their pension offering is. Some umbrella companies appear to be offering more on pensions (over and above auto-enrolment) to make themselves stand out to professional freelance contractors entering the umbrella marketplace for the first time since last week’s off-payroll reforms. (Chapter 4)
9. Reach out
If you come across an umbrella arrangement that you do not understand or that seems different to what we cover in our report, please let us know. Although we can’t provide advice or guidance on individuals cases, hearing about your experience will be very useful for our future work in this area.
One final thing before you go off to read our report!
One of the aims of the report is to help increase public knowledge of how umbrella companies work. And although it was written with lower income agency workers in mind – practically speaking, it will certainly also be useful to professional freelance contractors. In particular, please note the chapters exploring the benefits and complexities of umbrella companies, and the nature and scale of disguised remuneration schemes.