Umbrella companies are put under the spotlight in new report by the LITRG

As changes to off-payroll in the private sector get closer, umbrella companies are being discussed more than ever. To help the supply chain of temporary workers understand umbrella companies and how they operate, the Low Incomes Tax Reform Group (LITRG), part of the Chartered Institute of Taxation (CIOT), has released an impressive 149-page technical report on umbrella companies. The report covers everything – from how umbrella companies work – to disguised remuneration schemes. Keep reading, and we’ll summarise the report entitled: Labour Market Intermediaries.

Overview

The report, a thorough 149-page investigative piece into all-things umbrella, sets out to “reconcile the very bad press that umbrella companies get with the fact that the authorities appear to consider them a legitimate part of the modern labour market.” It starts with an overview of the error in the Finances Act 2020 and suggests HMRC has no problem whatsoever with compliant umbrella companies.

“HMRC had a recent opportunity to consign umbrella companies to history when a drafting error in the Off-Payroll section of Finance Act 2020 implied that the role of umbrella companies may become redundant after the April 2021 private sector IR35 rollout. However, HMRC rapidly published a clarification on the matter, making it clear that it was not the intention of the legislation to effectively cut umbrella companies out of the supply chain.

This suggests that the poor reputational view of umbrella companies is not entirely shared by HMRC. So, in this report, we also try to reconcile the very bad press that umbrella companies get with the fact that the authorities appear to consider them a legitimate part of the modern labour market.”

The number of contractors requiring an umbrella has grown significantly since 2017. As a result, the number of providers claiming to be compliant umbrella companies has grown to over 500. Frustratingly, while a significant majority of umbrella’s pride themselves on compliance with HMRC rules and regulations, the small minority have given the industry a negative reputation because they’ve turned out to be tax avoidance schemes.

Umbrella companies in the UK

Umbrella companies first came into the marketplace in 2000, but a lot has changed over the last 20 years. There was a rapid increase in demand for umbrella companies in 2017, as HMRC introduced changes to off-payroll changes in the public sector – resulting in a higher number of ‘inside IR35’ roles.

With off-payroll in the private sector coming into effect in a few weeks, umbrella companies are experiencing demand like they’ve never seen before. Amazingly, the LITRG’s report identifies there are over 600,000 contractors and agency workers requiring umbrella companies, and there are over 500 payroll providers out there. While most umbrella companies are compliant and operate in their employees’ best interests, some appear to have popped up overnight and are looking to make themselves some quick money rather than offer compliant payroll services.

What’s covered in the report?

The report is based on research collected from 25 umbrella companies in the UK. It covers everything that you may want more information about before choosing an umbrella, including:

• How umbrella companies work and who uses them;
• Why umbrella companies are popular payroll options for agencies and end-clients;
• The supply chain;
• Travel expenses and associated legislation;
• The benefits of using an umbrella company, including employment rights;
• Umbrella company payslips;
• Disguised remuneration, the Loan Charge and the risks of engaging with tax avoidance schemes.

Advice for contractors interested in using umbrella companies

The report suggests there is nothing to worry about when engaging with an umbrella company for payroll services – providing they’re compliant. However, it does highlight the lack of regulations within the sector that could make it easy for non-compliant providers to compete alongside trustworthy businesses.

While a lack of regulations has been raised as a concern, the Labour Market Intermediaries report identifies two accreditation bodies that “self-regulate” the umbrella sector by actively promoting compliance. These are the Freelancer & Contractor Services Association (FCSA) and Professional Passport. If you’re looking for an umbrella company for your payroll, it’s a good idea to look at members of these bodies, as they will have undergone audits as a way of proving their commitment to compliance.

It’s imperative that contractors, freelancers and agency workers undertake their own due diligence when choosing an umbrella, and the report reiterates this, stating that it “is extremely important that workers always do their own research into an umbrella company.”

A “minority” of umbrella companies tarnish the industry’s reputation with “bad practices” and “non-compliance”

Victoria Todd, Head of the LITRG, said the following about the Labour Market Intermediaries Report:

“This report sheds light on an under-researched part of the labour market.

Many people think that umbrella companies exist only to exploit the tax system and lower-paid workers. That is not the case. They perform a number of useful and legitimate functions such as taking on the payroll and HR function of temporary work agencies who can’t or won’t do this in-house and providing an alternative route for freelance contractors who would otherwise have to work through a limited company.

However, there is a minority of umbrella companies whose bad practice and non-compliance sadly tarnishes the rest of the industry. This includes some set up specifically to operate disguised remuneration schemes.

One of the outcomes of the public sector off-payroll changes in 2017 was a mass shift of contractors into loan arrangements via umbrella companies. This did not end well. Serious and urgent work is needed to prevent this happening again with the private sector off-payroll changes being introduced from April 2021. A single enforcement body for employment rights, as is being considered by the Government,3 would help but is not on its own sufficient.

While disguised remuneration is very topical, in order to understand the experiences of most umbrella company workers, it is important to look beyond it. What we found when we did that was very interesting and thought-provoking and will certainly help shape our future work in this area.

Looking across the landscape in a balanced way, it is clear from our research that the general poor reputation of umbrella companies does not uniformly match the reality and is not deserved by many in the sector. It is important that this is acknowledged and that the balance is redressed.

We hope this report will be used widely: by government and workers alike to gain a better understanding about where the issues lie; by umbrella companies and the industry to improve standards; and by policymakers and advocates to work out where best to direct energy and resources going forward.”

Use an umbrella company you can trust

Founded by experts with over 20 years of experience in the contractor payroll industry, Churchill Knight Umbrella is an FCSA accredited umbrella company that has helped thousands of contractors get paid efficiently and compliantly. If you are exploring the possibility of using an umbrella company for an upcoming contract assignment, please contact us today for a free, no-obligation take-home pay projection. You can call our friendly team now on 01707 871622, send us a message, or request a tailored umbrella company calculation here.