The umbrella company sector has recently come under scrutiny from several stakeholders. Some have gone as far to refer to the marketplace as being like the “wild west”. Keep reading our blog, and we’ll explain why the umbrella company industry has been criticised and what you can do to ensure you only use compliant umbrella companies for your payroll.
Is it fair to refer to the contractor payroll supply chain as the “wild west”?
In a recent report called How Contracting Should Work, the Loan Charge All-Party Parliamentary Group (APPG) exposes non-compliance in the contractor payroll sector and urges the government to regulate the umbrella company marketplace. In the report, Labour MP and Co-Chair of the Loan Charge APPG, Ruth Cadbury, said:
“It is clear from our inquiry that there is significant non-compliance in the worryingly opaque supply chain, which has been dubbed ‘the wild west’ as a result and the lack of regulation enables exploitative practices, as well as enabling promoters of tax avoidance schemes to operate.”
Andy Chamberlain, the Director of Policy at The Association of Independent Professionals and the Self-Employed (IPSE), backed the Loan Charge APPG’s report and said:
“The report is absolutely right to conclude there is an unregulated ‘wild west’ in this area – which is now more of a risk to contractors than ever as the changes to IR35 force more of them to work through umbrellas and intermediaries.
We wholeheartedly endorse the report’s calls for greater regulation in this area to protect freelancers and contractors from the pitfalls of malpractice and disguised remuneration schemes. Government must quickly introduce tighter regulations on this sector and ensure nothing like the Loan Charge scandal can happen again.”
“I support many of the key findings in the report; for example, the off-payroll reform has undoubtedly been a driver in the use of umbrella companies, an industry which is yet to be regulated despite promises made by government with the publication of The Good Work Plan in 2018 as well as campaigning from FCSA, REC and others.
In my opinion, this is the fundamental problem that absolutely must be addressed if the government is serious about stopping contractors getting caught up in tax avoidance schemes.
[…] However, the report fails to provide balance in some key areas. For example, Preferred Supplier Lists (PSL’s) are discussed only in a negative light and linked inextricably to kickbacks, when that is not always the case.
Most PSLs are driven by compliance considerations to protect the agency workers from non-compliant umbrella companies and tax avoidance schemes, and the agency from risk under the Criminal Finance Act should they fail to prevent the facilitation of tax evasion.”
The quotes above from highly reputable sources reiterate how important it is that more is done to safeguard temporary workers from the malpractice of non-compliant payroll providers. Should the government regulate the umbrella company sector to resolve the issues? We’ve shared our thoughts in the article: Should Umbrella Companies Be Regulated? In a separate article, we also investigate the pros and cons of regulating umbrella companies.
How to choose a compliant umbrella company
If you’re a temporary worker and you’re interested in using an umbrella company, or you’re going to take an assignment that requires payroll through an intermediary, here is some helpful advice. While 99% of UK-based umbrella companies are compliant and will have your best interests at heart, some are disguised remuneration schemes (tax avoidance schemes) and engaging with these could land you in serious trouble. Here are some tips to help you choose a compliant umbrella company.
- Only use an umbrella company that is accredited by either the FCSA or Professional Passport. These two professional bodies are committed to ensuring the supply chain of temporary workers is compliant and ethical. For an umbrella company to achieve these accreditations, they must undergo a series of audits and assessments – to prove all internal processes are compliant with HMRC’s rules and regulations.
- Check the umbrella is based in the UK and has a decent trading history (for example, it hasn’t been set up within the last month or so).
- Be certain the payroll providers you request an illustration from are operating PAYE – HMRC’s tax system. If a provider is offering you inflate take-home pay (sometimes as high as 90%), alarm bells should be ringing because they are almost certainly operating a non-compliant arrangement.
- Make sure you check online reviews and only look at reputable platforms such as Trustpilot and Google.
- Don’t be afraid to ask any questions if you have a concern. The best umbrella companies will happily run through their service with you – addressing any questions along the way.
- Remember that the only thing that’ll impact your pay retention between compliant umbrella companies is the margin they deduct. Therefore, if you approach two umbrella companies – both with a £20 per week margin, you should take home the same amount with each – to the penny. Unfortunately, some umbrella companies are providing temporary workers with deliberately misleading and inflated take home pay calculations. If you’re interested in getting an umbrella company calculation you can trust, please visit our sister company’s website – Umbrella Company Calculator. We’ve written a guide covering umbrella company margins, and you may find it helpful.
Top 10 umbrella companies
If you’re looking for a compliant umbrella company you can trust, you’ve come to the right place. We’ve collated our top 10 umbrella companies, and they’re all accredited by either the Freelancer and Contractor Services Association (FCSA) or Professional Passport. Please check them out now – some have special offers at the moment!