Julia Kermode, CEO at Freelancer & Contractor Services Association on why umbrellas should continue.
A storm of negative media coverage has enveloped umbrella companies over the last few years and the political environment for umbrellas still presents our sector with many challenges. The right, the left and the unions in between have all got something to say about umbrellas but it was pleasing to hear Matthew Taylor come out and support umbrellas with a balanced view when he published his Review in the summer. The Taylor Review acknowledged that the sector is valuable both in terms of the benefits to the flexible workforce and contractors as well as providing significant financial benefit to the Chancellor of the Exchequer and the Treasury. Given this, it is worth considering what has fuelled the negativity towards umbrellas.
In 2014, we saw a considerable backlash against umbrellas when the onshore intermediaries legislation forced recruitment agencies to become liable for the tax and NI of workers who were not genuinely self-employed. They turned to umbrellas for the solution and we saw a swathe of contractors moving wholesale from self-employed status to become employees of umbrella firms. However, assignment rates did not always increase to take account of the additional tax and NI and in those instances workers bore the brunt as they received less income. Trade unions blamed umbrellas and over the past three years we have seen many unions actively campaigning against umbrellas across a number of business sectors. The premise of the unions’ arguments has been to debate what they consider to be unfair business practices being conducted and contractors being treated unfairly.
The media picked up on the arguments and stirred up public passion as programmes like Channel 4’s Dispatches and BBC One’s The One Show sought to expose the activities of some disreputable umbrella companies in the building trade. We are not denying that such activities happen and as the representative trade body we exist to drive up standards and rid the industry of the baddies. We are of course concerned about the proliferation of poor practice because it unfairly tarnishes the many compliant businesses that work hard to ensure that they operate to the highest possible standards.
Two more pieces of legislation designed to deal with perceived concerns about umbrella also seemed to be another attempt to put the nail in the coffin of umbrella working. HMRC eradicated tax relief for travel and subsistence expenses (unless the absence of supervision, direction or control can be proven) as well as the ability to receive the relief at source by preventing the ability for taxable pay to vary according to expenses. The latter was designed to stop employees benefitting from salary sacrifice albeit that umbrellas do not operate salary sacrifice in the general meaning. However, within the legislation HMRC amended the definition of salary sacrifice to ensure umbrellas were caught and did it without any consultation. Yet, despite their best efforts umbrella firms stood fast. Contrary to popular belief, the umbrella model is not solely about tax relief and FCSA research has shown that fewer than 40 per cent of umbrella employees on average claimed such relief on their travel and subsistence expenses prior to these changes.
Umbrellas on the rise
Subsequent legislation changes saw IR35 reforms in the public sector come into effect in April this year which has led to a rise in demand for umbrellas, because IR35 does not need to be considered for (umbrella) employees. Again, the increase in umbrella use has also brought more criticism. The new legislation has seen a rise in non-compliant dodgy umbrellas springing up, promising unfeasible returns to contractors who are being enticed by their ‘deals’. Some recruitment agencies are finding it difficult to ensure that their contractors are being paid compliantly because if they insist on contractors using their Preferred Supplier List (PSL), they risk losing their contractors who are unwilling to change providers. Some contractors are aware that these schemes are dubious at best, but are choosing to put themselves at significant personal financial risk to enjoy increased income in the (mistaken) belief that HMRC won’t catch up with them.
We did of course warn HMRC about the likelihood of such non-compliant schemes cropping up but they pressed on to push through their ill-thought through legislation. The upshot is that HMRC is now having to deal with the fallout.
This summer we have seen a number of HMRC spotlights being shone on disguised remuneration and we all need to work hard collectively to discourage people from signing up to these schemes which, if they sound too good to be true are probably just that. I wholeheartedly applaud the plethora of agencies working hard to educate and advise their contractors of the risks associated with dodgy schemes and to encourage them to use a safer, compliant option but we have a long way to go.
Whilst it is good news that agencies are working proactively with their compliant PSL partners to safeguard their contractors’ financial affairs, I am still concerned that some agencies are still unaware about how their contractors’ chosen umbrella firms operate. This needs to change otherwise agencies are also putting themselves at risk under the Criminal Finances Act which came into effect on September 30th.
Criminal Finances Act and due diligence
The Criminal Finances Act means that it is now imperative for agencies to conduct due diligence on their supply chain otherwise they risk the new corporate criminal offence failure to prevent tax avoidance. Those found guilty can potentially face an unlimited fine, a criminal record and of course reputational damage. Good umbrella firms should have already been working with their agency partners on this. However, those agencies without a PSL could be at risk if they do not have any due diligence processes in place to help prevent their staff or associates from encouraging or promoting non-payment of the correct tax. Something as innocuous as referring a contractor to an umbrella can have corporate criminal consequences if that umbrella is actually a tax avoidance scheme and if there were no processes in place to prevent such a referral to a dodgy provider. This can be avoided by conducting due diligence on your chosen partners, developing a PSL and ensuring all staff stick to it.
Agencies must also have procedures in place to ensure that tax is paid on any referral fees received by the business or their staff. Such referral fees or incentive payments are taxable income and unless there are processes in place the agency is once again at risk of not preventing tax avoidance. Good compliant umbrella companies have been working hard to ensure that any referrals or incentives given to agencies are consistently dealt with properly.
However, there are some companies which do not take the same level of care and entice agencies to work with them for financial gain. Such unethical practice makes it difficult for compliant businesses to compete so we hope that the Criminal Finances Act will encourage greater compliance and go some way towards levelling the playing field.
Raising standards
The government is considering whether regulation is needed within the umbrella industry and at FCSA we welcome any moves and developments to raise standards across the whole industry and rid the sector of the cowboys once and for all. Whilst we are a long way off seeing any measures being introduced, compliant umbrella firms have nothing to fear from the prospect of regulation, so I am very positive about the future for such firms to flourish.
Earlier this year we conducted some research that showed that umbrella working is being adopted by more and more high-end professionals across a range of occupations. We have seen a significant rise in assignment rates over the last two years with 73 per cent of umbrella workers earning £15 per hour or more compared to 53 per cent earning the same rate in 2015. The research also revealed that the average length of an assignment has also doubled in the last two years with umbrella employees working, on average, 29 weeks per assignment compared to just 14 weeks in 2015. Also, the average length of employment has increased by over 50 per cent since February 2015 with contractors staying with their chosen umbrella for 46 weeks on average compared to 30 weeks in 2015.
The facts speak for themselves, showing that the umbrella marketplace has matured a lot over the last two years offering stability to those who choose to work in this way. Higher rates of pay, longer assignments and longer employment tenures means that umbrella working is a lot more secure than the numerous other precarious ways of working that we see in the UK today.
We know that Matthew Taylor agrees and recognises the importance of umbrella and our latest research along with his support is to be much heralded in an industry which is so often maligned and misunderstood. We have taken many knocks but we have come a long way. It’s about time we celebrated the hard work of the many compliant umbrella firms that are committed to providing a first-class service that separates the rogues from the reputable.
Source: The Global Recruiter Issue 182 | Julia Kermode