With the private sector off-payroll rules due to hit the contracting sector in April 2020, an industry expert explains what PAYE umbrella companies can offer contractors caught by the changes, and why you should watch out for unscrupulous operators.
Many thanks to Julia Kermode, chief executive of the Freelancer and Contractor Services Association (FCSA), for answering our questions.
How do you think the April 2020 changes will affect the demand for umbrella companies?
When the reforms hit the public sector in 2017, many public services knee-jerked and put all their contractors inside IR35 to avoid any come back. This meant that many contractors have been taxed at a similar rate to employees but without any of the employment benefits that come with a permanent position as an employee. And contractors do not like it.
Faced with being deemed an employee and not being able to work through their own personal service companies, many contractors will be prompted to work through different models with umbrella being one option.
In a recent survey, the Association of Professional Staffing Companies (APSCo) conducted some research amongst recruitment companies and the majority – a significant 91% – of professional recruitment companies expect umbrella company usage to soar in response to the private sector changes, shunning personal service companies because of the new rules.
However, contractors should choose their umbrella carefully as there are varying standards within the sector, with the worst players pretending to be umbrella whereas in reality they are actually tax avoidance schemes (see below).
Did the public sector implementation lead to a rise in illegal umbrella offerings?
Most definitely. Since the new off-payroll legislation hit the public sector we have seen a proliferation of schemes that aggressively target professional contractors to sell their product of higher take-home pay.
Sometimes these schemes label themselves as “umbrella”, but they are not umbrellas at all, and they are bringing the sector into disrepute. They “work” by paying a small portion of contractors’ earnings via PAYE and then disguising the remaining larger part of their income as something else, often an offshore loan. Most of these schemes are illegal. Any scheme that sounds too good to be true probably is.
Although these companies are suggesting they can reduce contractors’ tax and NICs, in reality anyone joining these schemes is likely to end up personally liable to pay those. The unpaid tax and NICs soon adds up, and by using such a scheme, individuals are putting themselves at very significant personal financial risk.
HMRC will usually backdate any charge for unpaid taxes to the date that they signed up to the scheme, and once fines and interest are added then the total tax bill will be extremely large.
Illegal ‘umbrella’ schemes – what to look out for
Our advice to anyone is please don’t sign up to any of these schemes!
- Anything that doesn’t pay 100% of your earnings through RTI payroll. The only reason a provider would offer to not pay 100% of your income via payroll is to disguise your income as something other than remuneration, and therefore avoid tax. You should be suspicious of any provider offering to split your income into two payments, one of which is taxed and the other is not. Our advice is don’t sign up to these schemes.
- Don’t believe anything that they tell you.
- Just because they state they are compliant with HMRC, that does not mean that they are.
- Avoid anything stating “HMRC Approved” as HMRC do NOT approve anything
- They will lie in order to entice you to their scheme.
- They will not support you if HMRC investigates.
- They are deliberately and aggressively targeting susceptible workers who have had their income reduced as a result of tax changes in the public sector
What do PAYE umbrella companies do for contractors?
Umbrella employers provide contractors with full employment rights, all statutory benefits including holiday pay, maternity pay, paternity pay, sickness pay, pensions, redundancy pay and adoption pay.
A contractor is an employee of its chosen umbrella employer and with that comes a responsibility for the umbrella firm to provide all normal HR functions of any employment relationship – a compliant umbrella company cares for its employees, the contractors.
The contractor has the best of both worlds – the stability and benefits of being employed whilst also having the freedom and flexibility to undertake contract work for numerous end-clients.
There is continuity of employment even when undertaking placements for numerous different recruitment agencies. This continuity of employment history can be particularly important for anyone looking to access personal finance solutions such as mortgages and loans.
And, for anyone working on very short-term contracts (e.g. shifts changing daily) or working for multiple clients simultaneously, the umbrella consolidates earnings from the various assignments into one pay packet. This means that all tax and NICs are taken care of together for the contractor, rather than needing to consider earnings from each assignment separately.
What key things should contractors look out for when choosing a PAYE umbrella company?
Umbrella firms have been in existence for some 20+ years and it would be advisable to choose a compliant umbrella firm that has a good track record. Look out for the FCSA Accredited Member seal of approval. To achieve FCSA accreditation, applicants must undergo an independent and rigorous assessment of their business services, operations, policies and processes, all of which are independently examined to ensure adherence to published FCSA compliance standards. FCSA assessors are themselves regulated accountants and solicitors who are leading experts in our sector.
Becoming FCSA accredited demonstrates to freelancers, contractors and recruiters that members are acting both professionally and ethically within the UK tax, employment and regulatory laws. Coupled with financial stability tests, FCSA accreditation is proof that professional businesses can take the lead in delivering the highest levels of industry standards.
A true umbrella will:
- Employ you
- Give you all statutory rights & benefits of employment (holiday pay, sick pay, pension etc)
- Give you the flexibility for numerous different end-hirers
- Consolidate your pay from numerous hirers into one pay packet
- Process the full amount of your gross pay through PAYE
Visit our select list of UK-based PAYE umbrella company providers.
PAYE Umbrella for Career Contractors
SG Umbrella, which is FCSA Registered and run by experienced accountants, may appeal to career contractors who are affected by the April 2020 off-payroll changes. You can switch between umbrella and limited, and contribute to your preferred pension (which is tax-efficient). Find out more here.