HMRC umbrella company guidance update receives rare show of support

The best official guidance yet on contracting through an umbrella company has emerged from the taxman.

Four new paragraphs on ‘How you get paid,’ and five paragraphs on ‘Checking your payslip’ are pleasing advisers once-critical of HMRC’s ‘Working Through an Umbrella Company.’

The online guidance still gives a rather anodyne account of brollies, however.

For example, one ContractorUK reader today outlines a common experience of umbrella company holiday pay which isn’t even acknowledged in the HMRC resource.

'Best guidance I've seen'

Nevertheless, the update represents some of “the best guidance I have seen from HMRC for contractors needing to work via an umbrella company,” says Clarity Umbrella’s Lucy Smith.

“It’s almost as if they have actually taken time to understand the mechanism of working as an umbrella company employee for the first time,” Smith, Clarity’s director told ContractorUK.

Kris Simpson at Cool Company is impressed too, saying HMRC’s uncharacteristic use of plain English may even “create a common language for the umbrella industry.”

'Will make it easier for contractors'

Cool’s UK country manager, he says that assuming HMRC keeps it up, “this will make it easier for contractors to choose a trustworthy umbrella that’s…based on facts not marketing.”

In the payslip part of the update, the Revenue lists five items that umbrella contractors (i.e. the umbrella’s employees), should not be alarmed to see deducted from their gross pay.

“While still a long way off the regulation we all want, any update that gives contractors more transparency and guidance on umbrella working is to be applauded,” says SAW Consulting.

'HMRC recognising the complexities of umbrella company working'

A compliance adviser to umbrellas, SAW’s Shelley Ankers-Wainwright told ContractorUK that refreshingly, HMRC was “recognising the complexities of working via an umbrella”.

Item five on the list of five lawful deductions could be unpacked more however, rather than HMRC’s opaque “other deductions that you have agreed to or are legally required to pay.”

Champion Contractors’ Chris Bloor reflected: “[Brolly staff] need to ensure the reconciliation statement on their payslip shows all of the deductions taken from the assignment rate.

“If it is lumped together as ‘employer costs’ then ask for a full breakdown…[to] be sure that you are getting everything that you should be getting in your take-home pay.”

'Assignment rate multiplied by your time'

Under ‘how you get paid,’ HMRC outlines the payment process when using an umbrella, from the worker submitting a timesheet to the agency paying the worker’s umbrella.

“This should be the assignment rate multiplied by the time you have worked,” the Revenue says. “The umbrella company is responsible for paying you as your employer.”

HMRC adds that some umbrellas pay as a rate the National Minimum Wage “for all hours worked” and then “make up your full rate with an additional payment, like a bonus.”

'Recognition of umbrella margin, too'

But it is another section of the guidance that catches Smith’s eye -- and has won her approval.

“The full breakdown by HMRC of deductions [is helpful for workers but so too is] recognition of our ‘margin.’”

Referring to ‘How an umbrella company works out your gross pay from the assignment rate,’ she added: “[Outlining] how it is taken…might [also reassure] those forced down this route.”

'Unite case will bring some clarity'

But it is the alleged taking of the Apprenticeship Levy “directly” out of umbrella workers’ pay that the Unite reportedly says it is now taking legal action over.

The union isn’t happy either about umbrellas passing the levy’s costs on to workers as an ‘administration costs’ deduction –  a lawful practice which the courts might address.

“The problem [is]…there are two different rates,” says ReLegal Consulting tax lawyer Rebecca Seeley Harris.

“The contract rate and the worker's wages. The legislation is restricted to deductions from the worker's wages, not the contract rate. So, currently because there is a lack of clarity and no regulation, umbrellas can deduct from the contract rate and it's not illegal or an unlawful deduction of wages. Hopefully, the Unite case will bring some clarity.”

'Contractors can trust the information provided'

In the meantime, umbrella companies, recruitment agencies and workers will need to consult legislation and HMRC guidance.

Increasingly sounding like a convert to the latter, Kool’s Mr Simpson said: “HMRC adding and updating guidance regularly is something the umbrella industry needs.

“Not only does it provide a centralised source for information on umbrella company services, but it's also 100% unbiased, meaning contractors can trust the information provided.”

'We should all play our part'

Yet how much exposure the guidance gets continues to raise a question mark, and if nobody reads it, improvements to its tone, content and format are a waste of time.

“My concern…which I have expressed before, is do contractors even know that this advice is available to them?” asked a worried Ms Ankers-Wainwright, from SAW Consulting. “We should all play our part in sharing it and educating contractors where we can.”

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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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