IR35: The clock is ticking……

What is an Umbrella Company?

An umbrella company is an employer of contractors who complete numerous different assignments at various locations for recruitment agencies and/or end hirers. The umbrella company enters an employment contact with the worker, and a service contract with the agency.

This gives the worker freedom to undertake a series of temporary assignments via a variety of agencies/hirers whilst having continuity of employment with all statutory rights and benefits.

Benefits to an Agency of using an Umbrella company

A fully compliant umbrella employer manages the commercial, employment, taxation, and statutory risks associated with the use of temporary workers for the supply chain. This minimises the overheads, employment risk and administrative burden of managing temporary workers in-house. It saves you time and money.

Benefits to the Contractor of using an Umbrella company

  • Employment rights, including all statutory rights and benefits such as holiday pay, maternity,
  • Employment history whilst working on a contingent, multi-location basis (notably to support access
    to finance, housing/mortgages, etc.)
  • Many workers will perform multiple assignments during a week or a month. Umbrellas consolidate their workers earnings and ensure appropriate taxes are paid. This avoids multiple employments.
  • Peace of mind that tax is paid appropriately, with no need to submit an annual self-assessment return to HMRC

How is Pay calculated

The umbrella company receives assignment income paid by the agency for the work undertaken. This is known as the assignment rate. Like any employer, the umbrella must cover employment costs including employer’s national insurance, holiday pay and pension contributions. These employment costs are deducted from the assignment income. Umbrellas also retain a margin to cover their costs for the services they provide. This is also deducted from the assignment income, and the balance is the workers’ gross pay.

With less than 2 months until the IR35 reforms are rolled out into the private sector, are you ready?

The chancellor, Rishi Sunak, will hold his Budget on 3rd March 2021 and we are not expecting any further delays to the IR35 private sector reforms.

What is IR35?

IR35 was introduced in 2000, to examine the relationship between a Limited Company contractor and the end user it engaged with.  The aim was to establish whether the relationship and working practices were one of ‘disguised employment’ or a genuine business relationship.

Since its introduction, it has always been the responsibility of the Director of the Limited Company to determine their own IR35 status. They would do this by considering core and secondary tests.

If they considered themselves inside of IR35, the income from that assignment would be deemed as employed income. It would be taxed similarly to an employee.

If, however they considered themselves outside of IR35, they were able to claim tax relief on a wider range of expenses, and benefit from dividend payments from any profits.

This approach was difficult for HMRC to police, leading to many simply considering themselves outside IR35 and receiving the tax benefits of doing so. Therefore, HMRC felt further reforms of the legislation were needed.

2017 …. Public Sector Reforms

In 2017, HMRC introduced the first major IR35 reforms into the Public Sector.

The aim?

To shift the liability for determining IR35 up the contractual chain, to the Hirer, with a view that those entities would abide by the legislation. If they did not, they became liable.

If the Hirer believed the assignment was inside IR35, then the fee-payer (either the Hirer or agency) became responsible for deducting employment costs such as Employer’s NI and tax and national insurance from assignment income.

The result? 

Many contractors found inside IR35 were moved to either inhouse PAYE or an Umbrella company to allow the correct taxes to be deducted.

April 2021 – Private Sector Reforms

The rules applied to the public sector 4 years ago, will now apply to private sector.

The Hirer will become responsible for determining the status of any assignment via a ‘Status Determination Statement’, and the fee-payer, the Hirer or agency, responsible for taxing that contractor correctly.

What does that mean for recruitment agencies?

This means that the decision lies with the Hirer, who will provide you with a Status Determination, Statement, and from there it is your responsibility to tax the worker correctly.

Next Steps for Agencies

Talk to your Hirers, talk to your contractors, and have a solution in place for them. If this is to use an Umbrella company, make sure it is compliant. Look for the FCSA accreditation to help.

Umbrellaphant are fully prepared for these changes and are ready to assist with any training you may need to get ready.

Do not delay. Get in touch with us now to see how we can help. 0121 227 2747