IR35: Seven in ten contractors forced into umbrella companies

Almost seven in ten contractors say their clients insist they work through an umbrella company because of the new off-payroll rules, a study shows.

So rather than remove 'disguised employees' or address 'disguised employment,' the April 2021 framework from HMRC seems to have created ‘forced employees,’ or ‘forced employment.’

In fact IPSE, which polled contractors, found that 69% of umbrella company workers are only using an umbrella company because their end-user forced them to -- due to IR35 reform.

'Pseudo-employment'

“The fundamental problem here is that people are being forced into pseudo-employment relationships they do not want,” says IPSE policy director Andy Chamberlain.

“Since the IR35 changes came in a year ago, thousands who proudly consider themselves to [be] self-employed are being pushed into umbrella companies.”

Contractor Mark Crisp, a transformation project manager on an NHS supply chain posted: "[I am] absolutely sick of being forced to work through umbrella companies.”

“The government really needs to set up and regulate these companies. After all -- it is the government that forced contractors and businesses down this road.”

'No choice, scared'

Crisp is in good company. Also on LinkedIn, a poll of 122 people who asked "Why do you work through an umbrella company?" shows that 74% selected the option, “I think I have no choice.”

Worse still, perhaps, the finding is addition to the 13% of respondents who ticked: "The end-user insisted and I’m scared."

“This is a pretty damning indictment of the effects of off-payroll with small contractor businesses ending up forced to use umbrellas,” said Dr Iain Campbell, formerly of the locums' body the IHPA.

Posting above the poll last year, Dr Campbell, who has given evidence to the Lords on IR35, asked how it can be “right” that business owners prone to "financial risk" must suddenly become employed.

'Loss of independence'

According to the IPSE study, the vast majority of umbrella company workers (70%) bemoaned that due to going brolly, they had lost their “independence and ability to work however they wish.”

But the “disadvantageous conditions” of umbrella company working is more than just a loss of flexibility, Mr Chamberlain hinted.

Sixty-one per cent say umbrella companies have “no advantages” whatsoever -- presumably why 74% are “dissatisfied,” the Association of Independent Professionals and the Self-Employed (IPSE) found.

'Contractor expected to pay'

Asked to specify, 80% of the umbrella users condemned having to cover Employer's National Insurance and, if applicable, the Apprenticeship Levy, through a reduction to their day rate.

“What I didn't understand until I was offered a role is that the contractor is expected to pay Employer NI,” posted a contractor returning to the market after a seven-year break.

“Plus, the Apprentice Levy and [the] payroll fee [comes] out of the day rate, and holiday pay is also rolled up into the day rate too!”

The contractor, Tim Harris -- a procurement leader added: "[Surely,] Employer NI should be paid by the employer. Isn't the clue in the title?!”

'Shocking to penalise contractor with 45-day payment term for us not being on their PSL'

Further specific contractor gripes of using an umbrella company have been outlined, rather bravely, by an umbrella company.

Lucy Smith, managing director of Clarity Umbrella volunteered: “One of our contractors has pushed back at a large agency [because the contractor] wants to work through us.

“But in a [shocking] turn of events, the agency has now said they will consider it, but as we are not part of the agency's PSL they will only pay on 45-day payment terms, as opposed to seven days if the contractor goes with one of their chosen brollies. If there are no concerns of non-compliance, why penalise the contractor?”

And penalised is how contractors often seem to feel. Online, one wrote: “I am really enjoying my current assignment with a great client and interesting work, but this really will be my last inside IR35 contract [via an umbrella].”

'Recommendations from government sought to stop forced employment'

At IPSE, Mr Chamberlain promised that the association would be sharing the stark findings of contractor dissatisfaction with umbrellas (one in two are “very dissatisfied”) directly with the government.

“We hope that they [government] put forward recommendations,” he said. “[They need to] stop freelancers from being forced into working for umbrella companies that limit their independence and [seemingly] give them no real benefits.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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