IR35 rules have proven to be controversial for over two decades now, with the introduction of IR35 legislation in 2000 leading to the emergence of umbrella companies. These umbrella companies are set up as a standard limited company and are operated by a third party who acts as an “employer” on behalf of its contractor employees.
The use of these companies can provide cost advantages for large organisations but their usage has proven to be controversial.
Umbrella companies have been accused of acting immorally or even illegally in recent years and an example of this was recently highlighted on BBC Radio 4.
On March 20, Dave Chaplin, the CEO of ContractorCalculator was invited to take part in BBC Radio 4’s MoneyBox show.
During this show, an anonymous contractor claimed they had to threaten employment tribunal action before their umbrella company paid out holiday pay owed to them and multiple colleagues amounting to roughly £6,000 each.
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It was pointed out that while dubious practices are often exhibited within the umbrella market, this instance was noteworthy as the umbrella firm in question was accredited by the Freelancer & Contractor Services Association (FCSA), a leading UK membership body dedicated to promoting supply chain compliance.
Dave noted stricter enforcement is needed from the likes of FSCA and today, he reiterated the following points raised in the programme: “Withholding thousands of pounds from what is rightly due to contractors, who had to threaten court action before the umbrella company in question paid out, is an utter disgrace.
“The FCSA must take the matter seriously, conduct an investigation and expel the umbrella that has perpetrated this wrongdoing from their group.
“The FCSA standard on holiday pay clearly falls short, and its codes are meaningless if not properly policed.
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“When the Off-Payroll legislation is rolled-out into the private sector in April, tens of thousands of contractors are likely to be required to work through an umbrella model so I would urge firms who use umbrella companies to conduct their own due diligence and ask for cast iron proof, not promises, that all payments are being made correctly.”
This example also caught the attention of Crawford Temple, the CEO of Professional Passport, who commented: “It was disappointing to hear this story. It is one that will serve to cast suspicion on the entire sector and the umbrella in question should be scrutinised and penalised.
“With more contractors likely to be working through umbrella companies under the new Off-Payroll tax rules, transparency is the key to protecting workers, as many will not be familiar with the workings of an umbrella.
“Transparency with workers is a critical component of a good working relationship between umbrellas, agencies and workers.
“Specifically on holiday pay, workers should receive pay reports with every payslip that allows them to see, at a glance, what their entitlement and position is, so that they receive what is due to them.
“Non-compliance in all its guises must be taken very seriously so that we can stamp it out and rid the industry of the providers who give the sector a bad name.
“The market, which includes the workers using these arrangements, must work together and share knowledge so that we can shine a light on wrong practices and non-compliant behaviour.”
Dave concluded by examining how IR35 changes may add additional difficulties for the companies and workers involved: “The new Off-Payroll rules are due to take effect in just a matter of weeks and we are likely to see more contractors being required to work through umbrella companies. But, we know from a survey IR35 Shield conducted amongst some 3,000 contractors that only eight percent of contractors would be happy to use an umbrella.
“I would urge contractors with no choice to ask questions and conduct their own due diligence to ensure that they understand the terms and conditions of the contract between them and the umbrella and are working through an accredited provider.
“A recruitment agency should provide contractors with an approved list of umbrella providers to choose from.”
In late February, Robert Thompson, a Legal Executive at Umbrella Reclaim, condemned umbrella companies at large, claiming their very setups were illegal and they were being used for tax avoidance purposes.
These claims and criticisms were put to HMRC and a spokesperson had issued the following response: “Some companies which engage contractors may choose to do so through agencies or umbrella companies and, as made clear in HMRC guidance, it is legitimate for umbrella companies to deduct employers’ national insurance contributions from the payment they receive from the recruitment agency.”
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