I was pleased to see (on 29th April) that HM Revenue & Customs (HMRC) updated its guidance on working through umbrella companies to give more clarity about how the supply chain works and what a contractor should expect from an umbrella company.
An HMRC spokesperson said:
“HMRC has published guidance to help contractors engaged through umbrella companies understand how they work and how they are paid. This will help address some of the common questions contractors may have regarding umbrella companies.”
The update was timely because there have been confusing articles in the news and social media about what is and isn’t lawful so far as umbrella companies are concerned.
HMRC is genuinely concerned with some of the bad practices in the industry, many of them designed to avoid tax. If you read HMRC spotlights there are many examples of schemes that are targeted by HMRC, for example here is one regarding disguised remuneration schemes.
Many contractors were lured in to using these schemes by the promise of higher take home pay and have subsequently been caught out by HMRC and asked to pay back taxes over many years. The adage “if it looks too good to be true….” has certainly proved correct for some. I would not call the companies that run these schemes umbrella companies because they don’t operate as an umbrella company should. But they are often badged that way by the media.
In our industry associations such as the FCSA, APSCo and Professional Passport have introduced codes to be followed by compliant umbrella companies. They carry out audits on those companies that want to say they abide by the codes. Having been through both audits I can confirm that they are extremely thorough and worthwhile. The underlying principle is to be transparent in your dealings. The FCSA, APSCo and Professional Passport are working closely with BEIS, HMRC and other Government departments to try to define a legal standard (set by Government) to be followed by umbrella companies. The statement by HMRC is a step in the right direction.
What's included in the guidance
In its guidance HMRC explains that:
- The rate paid by an agency to the umbrella company known as an “assignment rate or limited company rate” is not a contractor’s personal rate. Compliant umbrella companies have always made this clear during an illustration call and/or a written illustration.
- The assignment rate should include:
- administration costs/margin
- employer National Insurance contributions
- employer workplace pension contributions
- holiday pay
- apprenticeship levy
- The rate paid to the umbrella company by the agency will need to cover the employer costs. Agencies, when agreeing rates with their own clients will factor in these costs. Agencies should be clear with contractors about the umbrella rates and what they cover. This information is nowadays set out in a key information document provided to the contractor before the assignment starts.
- The umbrella company will pay employer contributions from the assignment rate and not deduct the contributions from a contractor’s gross pay. At PayStream a reconciliation statement is provided with every payslip making this clear.
- The reconciliation statement to make explicit that where an umbrella company pays the contractor the National Minimum Wage plus another element, this should all be taxable. HMRC highlights that if any of this is stated as ‘non-taxable’, it may be an indicator of an avoidance scheme.
- The reconciliation statement should reiterate that the employer National Insurance Contribution liability is deducted from the umbrella’s rate, not the contractor’s gross pay.
- Holiday pay should be paid out. If the umbrella retains any holiday pay it should be paid out when a contractor leaves.
We have received a few queries from contractors over the last few weeks asking for further detail of how an umbrella company works and how their take home pay is calculated. Many of whom have switched from their own PSCs as a result of the off-payroll legislation. If you are new to working through an umbrella company or are simply unsure what to look out for, here is our advice:
Our advice to contractors
Here is our advice to contractors who are new to working through an umbrella company or are simply unsure what to look out for:
- Is the umbrella company accredited by FCSA, APSCo or Professional Passport?
- Has the umbrella company provided a clear illustration showing the umbrella rate, its costs and your gross and net pay.
- Has your agency dealt with the umbrella company before and can vouch for it?
