A UK payroll provider has stated that recent legislation, bad press and labour market transformation have effectively made umbrella companies redundant.
However, leading voices in the contractor industry disagree, stating that events such as the IR35 public sector reforms have actually led to an increase in the volume and quality of umbrella firms.
Benefits ‘practically extinguished’
Payroll outfit RACS Group claims that demand for umbrella companies has plummeted due to a range of factors, including HMRC regulation, campaigning by unions and the rise of the gig economy.
“The primary purpose of the umbrella model was to allow the deduction of legitimate expenses in order to increase contractors’ net income,” said Suhail Mirza, director of RACS Group. “That benefit has been practically extinguished by recent legislation, including off payroll IR35 and the travel and subsistence restrictions.”
Due to this market shift, RACS announced that will be divesting from umbrella and launching a new product for recruitment agencies based on the American Professional Employer Organisation (PEO) model.
“The overriding purpose of the PEO model is entirely distinct to the historic umbrella approach, as it’s not driven by the goal of maximising tax relief,” added Mirza.
End of the beginning?
However, although leading contractor industry figures acknowledge that legislative changes in particular have affected the market, they haven’t seen huge numbers of umbrella companies go under as a result.
Speaking with AccountingWEB Julia Kermode, CEO of the Freelancer & Contractor Services Association (FCSA), disagreed with the assertion that the legislation changes on travel and subsistence tax relief spell the end for umbrella firms.
“The changes severely restricted the number of people that can qualify for that tax relief, so it did affect the financial model for a lot of umbrella firms,” said Kermode. “That said, a large number of contractors weren’t claiming that relief anyway, and it largely depended on which sectors they were in.
“What we have seen is umbrellas offering a better service that is not so reliant on that tax relief, providing contractors with more benefits of employment or a higher level of service so they can win their business, rather than just being reliant on the financials of that particular relief.”
For Dave Chaplin, CEO of ContractorCalculator, while the PAYE umbrella does not have the tax advantages it used to, for firms wanting to keep an arms-length arrangement and for contractors that do not want to set up limited companies it remains a sensible solution.
“It’s very good for contractors who are toe-dipping the contract market for a few months, who might then decide to set up their own company and pursue a long-term contracting career,” said Chaplin.
“And of course, if you are likely to always be caught within the IR35 legislation an umbrella would be the better option.”
IR35 reforms lead to umbrella boom?
Another variable in the umbrella debate is the reforms to IR35 for the public sector, which according to experts has actually boosted demand for umbrella companies.
“Since April this year we’ve seen a massive increase in demand for umbrellas and a lot of new umbrella companies setting up,” said the FCSA’s Julia Kermode.
“Hirers, rather than going through the complexities of putting contractors on their own payroll or on agency PAYE, are often looking for umbrellas that will actually employ the contractor and therefore a solution in terms of IR35 because it doesn’t need to be considered.
“It then does mean that the contractor is on payroll, so they’re taxed as an employee, but at least with a good umbrella they would then be getting benefits of employment as opposed to just going on a payroll with the hirer or the agency and not necessarily getting that full 84 statutory benefits and rights of employment.”
Professionalised, not redundant
Recent FCSA research has found that people using umbrella companies are now earning a higher rate than two years ago, and their average assignment length has increased.
According to Kermode this suggests that they’re doing more professional roles, and indicates that rather than it being low-skilled, short-term roles the average umbrella contractor is doing more meaty, higher paid jobs.
“For my point of view I’m seeing the sector professionalised, rather than become redundant,” Kermode concluded.
About Tom Herbert
Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.