Richard Curtis considers the implications of working for an umbrella company.
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Workers who have undertaken work arranged by an employment agency may have found themselves working for an umbrella company.
Generally, the recruitment agency would employ a worker who would undertake work for a client of the agency; however, it is increasingly common for the worker to be employed by another business, commonly known as an umbrella company. So, the client company pays the recruitment agency for the services of the worker; the agency then deducts its fee and pays the umbrella company, which then pays the worker for the services they render to the end client.
In this way, the deduction and paying of income tax and Class 1 National Insurance contributions (NICs) from the worker’s salary under the pay-as-you-earn (PAYE) system becomes the responsibility of the umbrella company. The employment rights of the workers have simply moved from the agency to the umbrella company.
A note of caution
In itself, there is nothing inherently wrong with such an arrangement. However, the fact that this is not always the case is evidenced by the Treasury’s recent response to a consultation on tackling non-compliance by umbrella companies with regard to payroll obligations.
The government believes that action is required to protect vulnerable workers and intends to make the recruitment agency (or the end client) rather than the umbrella company responsible for the income tax and NICs liabilities.
The reason for these changes is that there have been cases of umbrella companies failing to correctly operate the PAYE system. Last year, HMRC flagged up its concerns about umbrella companies; for example, that they: offer financial incentives significantly higher than industry standards; provide the workers and agency with different versions of the payslip; make payments to workers that are higher than the amount on their payslips; make payments through third parties; and are based outside the UK.
Umbrella company workers should check whether any of the above points apply. Further, a worker who is contracted through an umbrella company should receive from the recruitment agency a key information document – including the name of the umbrella company, the minimum assignment rate, deductions to be made by the umbrella company, and the minimum gross pay – as well as a payslip and possibly a reconciliation statement detailing how the gross pay is calculated.
Warning signs
Workers who are employed by an umbrella company have the same employment rights as others. They should be paid at least the national minimum wage or national living wage, be enrolled in a pension scheme if they are eligible, and be entitled to paid holidays.
In its Spotlight 60 (tinyurl.com/3fxksz5p), HMRC warns that a non-compliant umbrella company could leave workers at risk of being involved in a tax avoidance scheme. Ultimately, individuals are responsible for their tax affairs and payment of the correct income tax and NICs liabilities. Such liabilities could arise if the umbrella company were to use a tax avoidance arrangement. These commonly disguise the salary or part of it as a loan, advance or other payment which is claimed to be non-taxable. The PAYE rules oblige the employer to deduct and pay income tax and NICs but if this is not done, HMRC may, in some circumstances, recover the liabilities directly from the worker. An interest and penalty charge may also apply. HMRC has published examples of workers who have fallen foul of the rules (at: tinyurl.com/yeymrc7h).
Conclusion
Although, as mentioned above, there is nothing inherently wrong with using an umbrella company, the fact that the government is consulting on them and HMRC is warning of tax avoidance means that workers should be aware of their rights and the potential issues.
Practical tip
Workers who find that they are employed by an umbrella company that is believed to be operating a tax avoidance arrangement are advised to move to a compliant company as soon as possible. Non-compliant companies can be reported anonymously to HMRC at: www.gov.uk/report-tax-fraud or by phone: 0800 788 887.
