Has legislation downpour washed away umbrella firms’ future?

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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 acting editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

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03rd Nov 2017 15:56

Call it what you like, the compliant employment "Umbrella" company understands its role as a "PEO" and has been delivering this service for many years. Demand for Umbrella employment has indeed increased considerably since April. The King is dead, long live the King.

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By gfisher
07th Nov 2017 09:49

The primary purpose of umbrella employment is to combine the security and benefits of full employment with the freedom of contracting. Umbrella employment also works for the compliant recruitment agency as the outsourcing of employment also provides the effective management of risks (commercial, financial, legislative and employment).

The ill-informed Mr Mirza fails to acknowledge that the PEO model is umbrella employment, albeit extended in the US to include temporary and permanent employees.

Clearly as the Government is slowly closing the tax avoidance schemes and loopholes used by some promoters, they are being driven to re-badge and re-market their services.

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By cfield
07th Nov 2017 11:06

If the sector is being "professionalised" it's probably because higher-paid contractors, such as NHS locums, are now being forced to work through umbrellas en-masse in the wake of the catastrophic public sector IR35 rules rather than through any choice of their own.

Has anyone got any statistics on how many contractors have left the public sector altogether, or on how much pay rates have had to go up to keep the rest on board? Both are quite high if my client base is representative.

I'd have thought the increase in "captive" clients more than makes up for the loss of income due to restrictions on expenses. Still, they should look on the bright side. At least now they don't have to spend ages checking if travel and subsistence claims should even be made!! In particular, the 24 month rule was widely ignored or at least misunderstood.

I don't agree that umbrellas are better for people caught by IR35. For one thing, the fees are often almost as high as engaging an accountant to look after a company. They also miss out on the 5% expense allowance, tax free expenses such as professional subscriptions and mobile phones, capital allowances for necessary equipment and pension contributions, all of which save 25.8% NI as well as tax.

Of course, public sector contractors don't have that choice now anyway unless they can a) pass the status test tool and b) persuade their clients to use it.

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09th Nov 2017 08:01

Not saying that Umbrella is better for all, but as you say, where end client has made a blanket decision not to use PSC's (which I understand but don't support), a compliant employment Umbrella is an appropriate solution.
Best advice process to workers still applies; PSC .v. Umbrella.
For more details on why the compliant employment Umbrella model is here to stay;
https://www.orangegenie.com/news/why-umbrella-companies-are-here-stay

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