Time to take a ‘rain check’ on unlawful umbrella companies

The employment landscape in the UK has changed significantly over the last two decades. There are now more than 5 million people self-employed in the UK (up from 3.2 million in 2000) and self-employed people now represent 15.3% of the labour market (up from 12% in 2000)¹. However, with the upcoming reform to IR35 due to come into effect next month, many offering their services through a limited company are opting to become umbrella employees instead.

The reform applies to contractors working with medium or large-sized organisations in the private and third sectors. Under the changes, responsibility for operating the off-payroll working rules will shift from the individual’s personal services company (PSC), to the organisation or business that the individual is supplying their services to. This includes responsibility for deciding whether the rules should apply and deducting the associated employment taxes and National Insurance Contributions.

Securing employment through an umbrella company reduces the ambiguity around tax and offers contractors all the benefits of being an employee, such as sick pay and maternity or paternity leave – with the freedom of being a contractor.

Recruitment agencies tend to work alongside a selection of preferred umbrella companies but earlier this month, the CEO of the Freelancer and Contractor Services Association (FCSA) urged recruiters to re-examine their list in the run up to the IR35 changes.

In an interview with Recruiter magazine^2, Phil Pluck said the FCSA has recently received “an avalanche of unlawful companies trying to get into our membership” before the new IR35 rules take hold and advised agencies to “do their due diligence”.

It is the FCSA’s responsibility to vet umbrella companies and ensure their solutions are legally compliant before admitting them into membership. Pluck disclosed that the application process can take up to five months before a decision is made and encouraged agencies to take the same level of precaution.

“Ask the awkward questions of umbrella companies trying to secure the contractor’s business or join an agency’s PSL” Pluck urged. “These people have vast amounts of money, partly because they’re using taxes that should have been paid to HMRC as part of their profits, and that allows them to fund large websites, very slick, and very slick systems that move people around within them without their knowing.”

He also revealed that he’d recently encountered a recruitment agency with 69,000 umbrella companies on its system – a demonstration of the scale of the issue around ‘cowboys’ within the market taking advantage of contractors.

At ACHIEVA, we’re dedicated to ensuring that everyone within our network operates to the same high standards as we do – protecting our clients, our candidates and our reputation. If you’d like more information on IR35 and the best way you can manage the reform, check out our resources page where you’ll find lots of useful information to guide you through the changes.

[1] ONS Coronavirus and self-employment figures

[2] https://www.recruiter.co.uk/news/2021/03/do-your-due-diligence-new-ir35-payroll-rules-urges-fcsa-ceo?utm_source=Adestra&utm_medium=email&utm_term=

See further reading on IR35 by downloading our factsheets here