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How accountants might pivot under the new off-payroll rules

Crawford Temple outlines the challenges that accountants are facing in the run up to the roll out of the new off payroll rules and how they can continue to service their contractor clients under the legislation.

1st Feb 2021
CEO Professional Passport
Columnist
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Umbrella
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6 April 2021 is a key date for accountants and their contracting clients. It is the date when the new off-payroll legislation comes into effect in the private sector, a year later than initially expected due to the global pandemic.  

The new tax rules will mean that medium and large sized hiring firms in the supply chain will become responsible for assessing a contractor’s employment status. And, faced with that responsibility, as played out in the public sector in April 2017, some hirers may opt to impose a blanket ban on hiring contractors working through their own personal service companies (PSC’s) and only hire them on an ‘employed for tax’ basis.  

Should a client determine that a role is ‘inside IR35’, a contractor could then be urged to work through an umbrella model.

Many professional accountancy businesses have a significant number of contractor clients operating through their own PSC’s, for whom they provide an accountancy service. Now, with the incoming changes to legislation, it is likely that many of these PSC contractors will be forced or encouraged to work through an umbrella firm. As a result, many accountancy firms are exploring the feasibility of setting up their own umbrella arm to service those contractors.

Operating an umbrella company can appear simple and straightforward with many seeing an umbrella model as operating in a similar way to that of a payroll service. It is not and it is important that the structure is compliant and correct from the outset.

The four key areas most often misunderstood:

Contracts

The employment contract operated by an umbrella company is not a standard one and has a significant number of nuances included that act as essential protective mechanisms.Whilst many companies claim to be able to offer these contracts, we know of companies that have spent significant amounts of money only to discover later that their contractors fall short of the required standards. The message is clear; seek legal advice to understand the correct contractual terms.

Insurances

The range of insurances required by an umbrella is standard; what is not standard is the range of occupations and roles that need to be covered. Obtaining insurance from a general broker, as opposed to a specialist in the umbrella market, could mean that your insurance policies will not cover any claims that arise.

Payroll

Using a standard PAYE payroll solution will not deliver the correct calculations, or outputs, for an umbrella provider.  When standard payroll software is used, it can significantly increase the risk of an employment tribunal and an award being made over employment costs that would significantly outstrip any charges made for the service. There are a number of specialist payroll providers in the market for umbrella providers to choose from.

Expenses

There are specific rules when it comes to expenses for umbrella workers that differ from the standard expenses applicable to employers and their employees. It is essential that these are fully understood as errors could result in liabilities that could be passed down to directors as personal liabilities.

Finding business

Establishing good relationships with recruitment firms is crucial to the success of your umbrella firm and nowadays, many recruiters have a preferred supplier list of umbrella firms they work with. Many now require an umbrella company to hold a compliance accreditation and some may have their own financial underwriting requirements which would be difficult for a new umbrella to satisfy.

Before spending money on contracts and legal advice, speak to the agencies that your current contractors work through to establish what they need from you in order to be able to work with you in your guise as an umbrella company.  

This will give you the opportunity to explore the potential and possibilities before incurring any financial costs. You will then be better placed to navigate the umbrella path smoothly and be able to continue to provide a service to your contractor clients when the new rules take effect.

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By Hugo Fair
01st Feb 2021 19:42

"Using a standard PAYE payroll solution will not deliver the correct calculations, or outputs, for an umbrella provider" ... is what a kinder person might call an unproven assertion!

I guess it partly depends on what you mean by a 'standard' Payroll (the cheap ones possibly don't have sufficient flexibility to be set up for your needs), but in general you'll only get incorrect results if you either enter incorrect data in the wrong place - or set-up the parameters of your system wrongly for your particular circumstances.

Like all PAYE scenarios, the processes for an umbrella organisation require the operator to have a good understanding of the relevant framework and regulations. All the good software solutions are capable of supporting these (and many other) processes - it is those running them that may need updated training (often available from the software suppliers).

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By GR
01st Feb 2021 20:21

I believe what Mr Temple is referring to is the actual reporting on the pay slip. The pay slips that these umbrella companies produce are highly detailed and can be two pages long. Many umbrella companies even produce a detailed guide for contractors to use to understand their pay slips.

The umbrella company pay slips that I have seen contain all sorts of details, e.g. a full reconciliation showing when the work was done/what time sheet was submitted/authorized, number of days worked and the amount of money that the umbrella company receives excluding VAT, the deductions the umbrella company makes (e.g. service charge/admin fee, employers pension, apprentice levy, employers NI, holiday pay, etc) and then you get the standard pay slip from whatever balance is left over. Without a full reconciliation and audit trial an umbrella company is unlikely to get the necessary accreditation and unlikely to pass the recruitment agency's compliance checks.

Without the proper specialist payroll software very costly mistakes could be made when calculating employer pension, apprentice levy, employers NI and holiday pay deductions based on the money the umbrella company receives.

Also, without the specialist payroll software an umbrella company owner would struggle to scale up and grow their umbrella business (as they would not be efficient). And the business model of umbrella businesses is high volume and low margin, and therefore achieving scale is essential.

I think the take home message from this article is that trying to setup an umbrella company from scratch without actually having the experience of working for one is likely to fail due to the costs involved and also due to the difficulty of getting the agencies to agree to use your new umbrella company that has no financial history. In fact, I would go as far to say that setting up a new umbrella company is much harder, more costly and more risky compared to setting up an accountancy firm.

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