Do umbrella workers need to worry about compliance?

by | Jul 19, 2019 | Agencies, Umbrella

You’ve probably already realised that the rules and regulations which surround working as a contractor are extensive and complex.

Whether you choose an Umbrella company or set up your own limited company for contracting, the issue of compliance is never far away. While you can rely on our team of specialist contractor accountants to take care of all your compliance issues, we thought it worth highlighting and explaining the main issues which you need to be aware of when it comes to Umbrella contracting.

Umbrella company compliance – does it matter?

The short answer is: absolutely! If you don’t work in a compliant manner, you could run into trouble with HMRC.

  • You may not pay the correct amount of tax.

If you’re caught, you could have to pay the tax you owe on top of hefty penalties from HMRC. Don’t forget, tax evasion is a criminal offence so in the worst-case scenario, you could face the full force of the law.

  • You may not be offered the employment rights you’re entitled to.

One of the benefits of Umbrella employment is that this method of working does entitle you to the same employment rights as any employee, including sick pay, holiday pay, access to a pension scheme, a record of continuous employment as well as paternity/maternity/adoption leave, among other things. If you don’t work with a compliant Umbrella company, you could find yourself short-changed on these benefits.

What compliance issues are relevant to Umbrella workers?

The main compliance issue relates to the amount of tax you have to pay, as well as other deductions from your pay check.

When looking for an Umbrella company, you may be surprised to find there are lots which offer 80%+ take-home pay. Like most things, if something sounds too good to be true then you will often find that it is, and tax law is no different. A compliant Umbrella company will employ its workforce, which means that it has a statutory obligation to deduct set amounts of tax. That’s the law. So, if you are quoted much higher take-home pay by any other companies you talk to, you should ask how, and what future risk this places at your door.

We explored this in detail in our article ‘85% take-home pay from your Umbrella? Don’t be fooled’ article, but let’s re-cap the main points.

  • Deductions from your gross pay:

Some Umbrellas deduct things from your gross pay before they calculate the tax that’s due. That way, you pay a bit of tax, but as far as HMRC is concerned, not enough tax for the gross pay you’ve received.

  • Salaries & loans:

Commonly, we’ll see Umbrella companies tell contractors they will pay a mixture of salary and loan. As an example, let’s say the contractor is due £1,000 for work undertaken. The Umbrella will pay them half via salary, from which they take an extra fee, typically 10%. The remaining money will be paid via a ‘loan’, which they say is not a taxable payment. This is unlikely to be a genuine loan and would be subject to challenge from HMRC. If it does transpire later to be a taxable payment (and this is usually the case) then you’ll have paid almost no tax, when in fact you should have paid around 25% (£125).

You can imagine the impact when this situation is allowed to continue.

There have been a number of high profile cases in recent months where these schemes have been exposed, leaving the contractor with a hefty tax bill and fines to pay.

Changes to off-payroll in the private sector

Unfortunately, we expect this issue to become increasingly important because of the forthcoming changes to off-payroll working in the private sector. Because some limited company contractors may find themselves caught by IR35 under the new rules, they may need to look at Umbrella contracting as an alternative. Our concern is that contractors will try to offset the difference in take-home pay by working with a non-compliant Umbrella which will offer a higher rate of take-home pay by skirting HMRC’s rules.

Our advice

There are 3 things you can do to protect yourself when it comes to compliance.

1.Understand Umbrella working

Umbrella contracting may seem a little strange at first: the fact that you become an employee whilst retaining the freedom to work on a contract basis. There are pros and cons to Umbrella contracting so make sure you understand this way of working before you decide if it’s right for you.

2. Get pay illustrations

Make sure you look at sample pay illustrations so you can see exactly how your pay is being handled. If anything looks odd, you can clarify before you commit. If your take-home pay adds up to 85% of your gross pay, be suspicious!

3. Choose a compliant Umbrella company

We are a member of the Freelancer and Contractor Services Association and have served tens of thousands of contractors to work compliantly for the last 30 years.

Find out more about our services for Umbrella contractors or get in touch to ask a question or to request detailed pay illustrations.

JSA Group

Specialist outsourced accountancy and payroll services for recruitment agencies, freelancers, contractors and umbrella workers. We’ve built up expert knowledge and experience within the industry by supporting tens of thousands of customers for 30 years.

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