In recent weeks, many agencies and umbrella companies have been concerned about reports in the press and circulating through social media that contractors who provide services through an umbrella company are having employer NICs and other employer costs unlawfully deducted from their pay packet. Adrian Marlowe explains the position.
An example of incorrect information from ‘experts’ can be seen in the article ‘Money Talk: Are there options for IR35 & umbrella companies?’ published by the Express on 27th February. There is a risk from this kind of article that contractors are being misled into believing that umbrella companies and agencies are making unlawful deductions.
All employers are obliged to operate the PAYE and the NIC schemes and umbrella companies are no different. As with any employer, all their overheads including employer NICs are taken into account in calculating and arriving at the employee’s gross salary. The confusion arises where the employee believes that he/she is entitled to the same rate that the agency pays the umbrella company, yet the employee usually has no contract with the agency or umbrella entitling them to that rate. The ‘expert’ quoted in the article, Umbrella Reclaim, which is run by a firm of Solicitors, should know this. They should qualify their advice so that contractors are not misled into paying the £99 charge it levies to be registered as a potential claimant without even assessing the merits.
Umbrella Reclaim also makes claims on its website that are simply wrong, alleging unlawful activity by both agencies that have PSLs and by umbrella companies. These not only could mislead, but also worry anyone working with agencies and umbrella companies without justification. It is perfectly acceptable for agencies to operate preferred umbrella supplier lists, not least to ensure compliance. It’s not clear why contractors would object to this, but our evidence is that some contractors want to use umbrella companies that may offer enhanced pay arrangements which may involve tax avoidance schemes.
The other ‘expert’ mentioned in the article, Rebecca Seeley Harris, is also incorrect for the same reason when she says “What you probably don’t know is that the umbrella will also deduct the employers’ NICs from your wages as well and that is an additional 13.8 percent.”
As regards the claim that agencies are not providing KID documents, that is a concern that individuals are able to refer to the Department of BEIS, which polices all agency regulation. However the KID document does not change the legal position about contract rates and deductions explained above. KID is an exercise in transparency intended to inform individuals in advance about how pay is structured. It is an acronym for Key Information Document, not ‘Knowledge Information Document’ as referred to in the article.
Another comment in the same article, that a company contractor is taxed as an employee yet has no employment rights, simply muddles the legal position and is likely again to confuse people. The new HMRC rules (Chapter 10 Part 2 ITEPA coming into play on 6th April, still known widely as IR35) allows hirers to assess whether an individual working through their own company (i.e. that the individual has an interest in) is working in the same way as an employee (deemed employee) of the hirer. If so the Fee Payer discussed in the article must pay employer NICs to HMRC on top of the invoice from the company and deduct employee NICs and PAYE from the same invoice as if the individual were an employee.
HMRC uses the term ‘deemed employment payment’; the individual in this context is never an actual employee. Whilst this may sound artificial, there is nothing new in the concept as all temps supplied by agencies are deemed employees for tax purposes whether or not they are actual employees. This has been the case for several decades.
I would add that the obligation under the IR35 rules to pay employer NICs mentioned above is a natural rational for agencies to arrange alternative payroll through umbrellas where agreed with the contractor, since hirers are often reluctant to meet the 13.8% add on cost. Agencies cannot absorb this charge within their margins any more than employer NICs can be avoided altogether, except where a contractor receives payment other than by way of employment income. So a switch from operating through a workers own company where invoices are paid gross to pay through the PAYE system is comparing apples with pears.
It is worth adding that those agencies that do run their own payroll will again absorb employer NICs within their own fees. In agreeing rates where the hire is direct, hirers also factor in all the costs including employer NICs. This does not mean they deduct them from wages. So whoever pays the individual, whether hirer, agency or umbrella, all the employer and employee NICs and any apprenticeship and holiday pay costs will always be taken into account in arriving at gross salary. That is how the tax legislation and the cost of hire works for any business and there is no basis for saying that it entitles contractors to make a claim.
There are other benefits to umbrella companies. They are often selected by contractors as an alternative to working through their PSCs, as they provide employment rights across multiple engagements and sometimes cost savings. Where they are recommended by agencies this is because the umbrella takes up the payroll and employment rights requirements leaving agencies, which prefer not to deal with payroll themselves (which they would have to do if the ‘deemed employer’ rules apply), to focus on finding the work for the individual.
Articles such as the one in the Express supported by ‘experts’ can appear to validate a position. Care should be taken to get the facts right and not unfairly undermine reputable businesses or exploit the fears of worried individuals.
In any industry there will always be some rogue operators and in those cases some action may be justified. However they are usually not representative of the industry as whole.
About the author: Adrian Marlowe is Chair of the Association of Recruitment Consultancies and MD of the recruitment and employment law specialist Lawspeed.