Compliancy, compliancy, compliancy

Julia Kermode

Julia Kermode outlines what agencies should consider when choosing an umbrella company.

Non-compliant umbrella employers have been making the headlines lately and for all the wrong reasons.

In September 2014, in his party conference speech, Ed Miliband pledged a crackdown on “umbrella” schemes used by construction firms to employ temporary workers. In his Autumn Statement, the Chancellor also targeted umbrella firms and more recently Channel 4’s Dispatches documentary exposed some unethical practices in an undercover report.

And let’s not forget the HMRC discussion on the future of travel and subsistence expenses, plus last month the Welsh Assembly opted to ban umbrella companies on its construction projects.

It has been a tough few months, and now is a good time to give some advice to recruitment agencies when choosing an umbrella company to work with. It all boils down to compliancy.

While there are some cases of bad practice among a minority of businesses which have grabbed the headlines there are also a large number of highly compliant organisations working ethically and correctly to provide a high level of service for its clients and contractors. The challenge comes in identifying a compliant company you can trust, sound in the knowledge that it continues to work within the rules of an ever changing legislative landscape.

Advice for recruitment firms choosing a compliant umbrella company:

1. Choose a member of an accredited professional body. This will give you some comfort that some compliance checks have been undertaken, but make sure you know what the accreditation means in practice as standards can vary.

2. Ensure they are operating within the law and provide:

– National minimum wage payments that are in line with legislation. Is it paid in full in a contractor’s salary or is it made up with expenses? Expenses should be made in line with HMRC legislation and guidance. If expenses allowances are too good to sound true then this should raise alarm bells;

– Holiday and statutory payments such as sick pay, maternity pay and paternity pay;

– An overarching contract of employment that allows employees to be eligible to claim travel and subsistence expenses;

– The provision of guaranteed hours;

– Access to a workplace pension;

– Full employment rights.

Any compliant professional employment company will offer the above as a minimum requirement. Avoid any umbrella system that places the worker as self-employed, which could be the much discussed EDM solution. Although HMRC have not published their position on EDM, some believe it should not be used due to the potential exploitation of workers as they have no entitlements and may not even receive the national minimum wage.

3. Onshore intermediaries: As part of the Government’s crackdown on ‘false’ self-employment among temporary workers, new legislation targets the incorrect payment of tax and national insurance from the self-employed. Key for recruiters to note is that they can face extremely costly financial penalties as all liability rests with the agency that contracts with the hirer and this debt can be passed onto the agency directors as a personal debt.

By using an umbrella company recruiters need to realise that temporary workers are under the employ of the provider and therefore any employment related risks such as income tax, national insurance payments and statutory benefits fall on the shoulders of the umbrella employer. If such an employer claims otherwise avoid working with them.

4. Tax relief: Recently HMRC launched a consultation into the tax relief for expenses of temporary workers. Research has revealed that travel and subsistence expenses are on average just 10% of turnover so tax losses to HMRC are minimal. The research also indicated that umbrella employees claim on average weekly mileage of approximately 181 miles which equates to circa 35 miles a day, almost double the national average of 18.5 miles per day. Removal of such tax relief would leave many umbrella workers worse off and could de-incentivise the workforce from undertaking assignments where travel is required.

However, the UK economy needs people who are prepared to work away from home to fulfil a need for short term assignments and projects. Furthermore, the proposals may result in an overall tax loss to HMRC if the workforce set up their own personal service companies instead, so the Exchequer will no longer receive the tax and NI collected when they were employed via an umbrella company.

Umbrella employment is a positive choice for many contractors. It enables workers to undertake a number of temporary assignments while having employment rights, all statutory benefits and continuity of employment.

According to current BIS analysis, 15% of the UK workforce is self-employed, from construction workers to teachers, and many are happily working with a compliant umbrella company. Unfortunately contention always grabs the headlines so the work has to continue to stamp out bad practice because it unfairly tarnishes the many compliant businesses that work hard to ensure that they operate to the highest possible standards for the UK’s growing flexible workforce.

Julia Kermode is chief executive of the Freelancer and Contractor Services Association (FCSA).