Should umbrella companies be regulated?

In recent news, the umbrella company industry has come under fire, and there are calls for umbrella companies to be regulated. This article looks at why there is a demand for umbrella companies to be regulated. We also suggest what we would like to see in terms of regulating the industry.

Why do umbrella companies get bad press?

We can think of many reasons why umbrella companies get and press, and we’re not here to put wool over your eyes. Many reasons are deserved, and umbrella companies are guilty of not helping their cause on numerous occasions. However, it’s important to remember that most of the 500 plus umbrella companies in the UK operate compliantly and in their employees best interests.

Here are some of the reasons we believe umbrella companies get negative press:

  • Umbrella companies exist to ensure temporary workers pay their fair share of tax and National Insurance Contributions (NIC). Therefore, it’s not a glamorous industry, and they’re never going to provide a service that everyone is thrilled to use.
  • Holiday pay has recently been in the spotlight, and it was rumoured that an FCSA accredited umbrella company was retaining holiday pay for themselves. This is not okay and unsurprisingly raised suspicions. However, we must add that this practice is not ethical, and a majority of umbrella companies would never do this.
  • Tax avoidance schemes are out there to line the pockets of directors, referring parties (facilitators) and, in many cases, the worker. These schemes have been known to get people in serious trouble, and many workers have used them against their knowledge. A lot of tax avoidance schemes market themselves as “compliant umbrella companies”, which has unquestionably led to a fall in respect for the industry.
  • Mini umbrella companies (MUC) have been reported on recently. These unethical arrangements are costing the government millions of pounds in lost tax. Also, workers are being paid by them against their knowledge – putting them at risk of an HMRC investigation in the future.
  • Many contractors who were once operating through a personal service company (outside IR35) have found themselves inside IR35. Consequently, they’re encouraged to use an umbrella. In many cases, this has been quite a shock. Umbrellas are seen as the enemy (perhaps unfairly in this example).
  • HMRC surely has no issues with compliant umbrella companies because they help workers pay the correct tax and NIC. However, umbrella’s that have acted unethically are often subjected to negative press on major news channels, such as the government’s website. This is entirely reasonable but often paints an unfair picture of the industry as a whole. The government should praise compliant umbrella companies, and fully back the processes involved in payroll (perhaps to be clarified by a regulator).
  • Contractors, freelancers and temporary workers are sometimes unable to make informed decisions about which umbrella to use for their payroll. This is because they’re presented with one or two providers by their agency. We believe workers should have more of a choice which company they use. Also, a small number of recruiters are making unethical referrals due to incentives being offered to them. This needs to be stopped immediately.
  • Some roles are advertised as “umbrella only”, meaning if a candidates doesn’t want to use an umbrella company for their payroll, they won’t land the contract. There is a lack of alternative to umbrella companies, and workers would perhaps prefer more of a choice. Also, it’s worth noting that umbrella’s are often the preferred route for recruitment agencies because they don’t want to pay workers themselves. This is because of the administration involved.
  • There is so much negative press surrounding umbrella companies, it’s easy to forget the benefits of using one. There are plenty of benefits of using an umbrella company, including Employee Benefits, continuity of employment, free insurance, and more.
  • Frustration caused by IR35 and the off-payroll changes (to both the public and private sector) is often taken out on umbrella companies. It’s vital that IR35 is taken seriously and assessments are made fairly, and we have sympathy for any temporary worker who can no longer operate outside IR35 due to a contentious IR35 assessment. However, it’s not the fault of umbrella companies – they exist to provide a payroll service for those inside IR35. Yes, take home pay through an umbrella is less than through a PSC (outside IR35), but the umbrella isn’t picketing the difference for themselves – it’s being sent to HMRC on behalf of the worker.
  • It’s our opinion that some individuals and groups with a large following are profiting from spreading negative messages about umbrella companies. We’re not going to name these parties, but we urge anyone looking into umbrella companies to conduct thorough due diligence.

How should compliant umbrella companies operate?

Umbrella companies provide a payroll service for temporary workers (PAYE). The end-client will pass on the worker’s funds to the agency, and then the agency will pass them on to the umbrella company. The umbrella will deduct the worker’s gross salary before sending them their net salary – with a supporting umbrella company payslip.

Stakeholders in the industry often misunderstand umbrella company deductions. Regarding the employment costs (Employer’s NIC and the Apprenticeship Levy), the government confirm:

“The rate paid to the umbrella company by the agency will need to cover the costs of the employer National Insurance contributions. The umbrella company will use this money to pay employer contributions and not deduct the contributions from your gross pay.”

Umbrella companies then make the standard PAYE deductions to a worker’s gross salary, including income tax and Employee’s NIC. Holiday pay can be accrued or paid each payment frequency, and most workers will be given this choice. No umbrella should ever permanently retain holiday pay for their own pockets, and this is wrong. Additional deductions may also include pension contributions and student loan repayments – depending on the individual’s circumstances.

The only income that compliant umbrella companies retain for themselves is the margin they deduct for conducting their payroll service (from the worker’s gross salary). This is often forgotten, as angry stakeholders imply that umbrella companies are greedy and retain more than their fair share.

Is there anything monitoring and regulating the umbrella company sector now?

Officially – no. However, both the Freelancer and Contractor Services Association (FCSA) and Professional Passport are experts within the industry. Both independently-operated businesses are dedicated to ensuring the supply chain of temporary workers is compliant and ethical.

What are industry stakeholders saying about regulating umbrella companies?

In response to a publication by the Loan Charge All-Party Parliamentary Group (APPG), APSCo’s Legal Counsel and Head of Public Policy, Tania Bowers, said the following:

“Many of the umbrella companies that our members work with – some of whom choose to join us as APSCo Trusted Partners – are experts in payroll and can offer contractors long term continuity of employment.  Although many staffing businesses can and do run agency payrolls offering workers “worker rights”, this is not necessarily better or indeed as good as the employment terms offered by compliant umbrella companies.

APSCo’s policy plan issued in February of this year echoed the asks of the APPG, including a need for Government to introduce a review of tax and employment status for the self-employed which needs to be accompanied by a new definition of these workers. Independent professionals should be defined as providing B2B services, as opposed to dependent contractors which provide personal services.

“We have also previously advised that the rollout of Off-Payroll needs to be accompanied by an implementation review to assess its impact on the economy and to enable Government to amend the policy where appropriate. It is APSCo’s view that in addition to regulating umbrella companies, the Single Enforcement Body working with HMRC should introduce a base line compliance code for umbrella companies to adhere to. Code compliance could be evidenced by audits undertaken by authorised trade bodies, accountancy firms, and specialist compliance companies.”

Tania Bowers also mentions the importance of the FCSA and Professional Passport in the so-called regulating of the umbrella company marketplace:

“We expect our members to offer workers a choice of umbrella companies and recommend an Approved Supplier List of APSCo Trusted Partners, FCSA and Professional Passport members which offers both choice in number and compliance protection for clients and workers.  We have worked on this basis for several years and this is in alignment generally with frameworks issued by the Crown Commercial Services.”

Regulating umbrella companies

Anything that provides greater clarity and compliance for honest, hard-working contractors, freelancers and temporary workers is a good thing. Therefore, we are absolutely for the regulating of umbrella companies. However, here are the points that we would like to make on the subject of regulating umbrella companies:

  1. HMRC should work with the FCSA, Professional Passport and APSCo to create a series of standards that umbrella companies must adhere to. These bodies are dedicated to compliance and protecting temporary workers and have been doing a marvellous job. The FCSA’s Codes of Compliance and Professional Passport’s Compliance Standards should be used as a benchmark for creating regulations within the sector.
  2. Regulating umbrella companies should not be seen as an alternative to achieving accreditations such as the above (FCSA and Professional Passport). These organisations have the entire sector’s best interests at heart and should be considered real assets.
  3. More needs to be done to educate those who engage with umbrella companies. There is so much bad press on umbrella companies. As a result, it’s easy to believe they’re non-compliant and rip off workers.
  4. Recruitment agencies should be encouraged to ensure their supply chain is compliant, and more should be done to monitor unethical referrals and rogue behaviour (transparency is key). Legislation such as the Criminal Finances Act 2017 is fine, but more need to be done to ensure it’s adhered to. After all, we cannot really think of any cases where an agency has been punished for failures in relation to the legislation, and perhaps it needs more teeth.
  5. The independent body responsible for regulating the umbrella company marketplace should clarify that umbrella companies are seen in a positive light by HMRC (even if HMRC won’t admit it) – assuming they operate compliantly.
  6. Everything that’s given umbrella companies a lousy reputation needs to be cleared up. Issues such as Holiday Pay, employment costs and umbrella contracts must be addressed and explained in easy-to-understand language. Non-compliant providers should be publicly shamed. Compliant providers should be praised.
  7. The government website has a lot of publications about umbrella company bad-practice. This is a good thing. However, seeing as compliant umbrella companies ensure workers’ pay the correct tax and NICs, we would like to see more positive publications about umbrella companies and the excellent work they’re doing to boost the UK’s economy. Explaining how they should operate is important, and the new regulator should have an easy to understand guide for each party (umbrellas, workers, agencies, etc.).
  8. Punishments need to be more severe for anyone deliberately using tax avoidance schemes or those who are helping to facilitate tax avoidance intentionally. The same applies to parties involved with the running of umbrella companies. Legislation such as the Loan Charge isn’t necessarily targeting the right people because it’s clear that many workers were using tax avoidance schemes against their knowledge (and having been pushed in the wrong direction by unethical parties). These people deserve compassion and leniency, and more needs to be done to catch those who deliberately chose to behave unethically.
  9. Any umbrella company found to be breaking the regulations or acting unethically (such as taking advantage of “legal” loopholes) needs to be publicly shamed on the government’s website.
  10. Enough with the scaremongering – let’s not forget compliant umbrella companies help the government receive tax and National Insurance payments. Therefore, is the government likely to stop umbrella companies? We hope not – providing the umbrella is compliant and transparent.
  11. Take home pay needs to be addressed so every umbrella company employee understands what they should be retaining. As we mention throughout our website compliant umbrella companies operate in the same way. The only thing that should impact a workers pay retention is the margin deducted by the umbrella. Workers should be made fully aware of this.
  12. Sort out the confusion surrounding employment costs. Umbrella companies cannot afford to cover employment costs themselves, or they’d go under in a heartbeat. If an independent regulator determines the best way for the employment costs to be covered is from the worker’s assignment rate (the current arrangement) – this needs to be explained to workers, agencies and end-clients – in black and white. Employment costs are often a cause for confusion. We understand why, but many publications imply umbrella’s are pocketing these deductions for themselves, and they’re not.
  13. Recruitment agencies should not be allowed to push contractors down the route of one or two payroll providers. There should be a minimum number of payroll providers for agency candidates to choose from, and each one must be compliant. More spot-checks should be conducted on agency preferred supplier lists, including examining any incentives.
  14. Incentives needs to be addressed and capped. Sadly, if unscrupulous umbrella companies or tax avoidance schemes offer rogue agents excessively high referral rewards – it’s inevitable that non-compliant referrals will carry on. These needs to be addressed, and a strategy needs to be put in place to ensure staffing agencies following strict guidelines.

Anything that can be done to improve transparency within the marketplace and protect temporary workers is a good thing. With so much negative press, people seem to easily forget the benefits to using an umbrella company (assuming it’s compliant).

Tax avoidance schemes are evil. Mini umbrella companies are evil. Disguised remuneration schemes are evil. Compliant umbrella companies providing a PAYE payroll service for temporary workers are perfectly legitimate, and should not be pushed out of the industry.

Conclusion

Assuming regulating the umbrella company industry will protect temporary workers – we’re all for it. Our recommendation is for the government to work closely with the FCSA and Professional Passport to produce compliance standards that’ll help stop malpractice.

If you are a contractor looking for an umbrella, we strongly suggest you only consider using an FCSA or Professional Passport accredited provider. To achieve these accreditations, umbrellas have proven they operate compliantly with UK tax law.

Top 10 umbrella companies

If you’re looking for a new umbrella company you can trust – please visit our top 10 umbrella companies. They’re all accredited by either the FCSA or Professional Passport, which means you’ll be in the safest hands. And, some of them have special offers on at the moment.

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