Why we need greater transparency about umbrellas and employment status

Transparent umbrella in rainy day

The HMRC rules surrounding umbrella companies aren’t always well understood, or even applied consistently. Recent changes in the regulations have had serious effects for workers and employers, with a major clampdown on the way travel and subsistence expenses are handled and how HMRC defines “self employment”. The object of the exercise was to stop the abuse of the travel and subsistence rules within the umbrella structure which was deemed to give an unfair advantage to umbrella workers and to stamp out “false” self-employment.

RIFT was founded in 1999 to help workers in the construction industry, and this is where many of the effects of false self-employment legislation and the subsequent travel and subsistence changes are being felt most. Working closely with government, HMRC, unions, construction firms and workers themselves,  we see a lot of confusion around this topic and we’re here to clear it up.

Here are a few of the most common questions we hear regularly from our clients at RIFT.

What do umbrella companies offer to workers and employers?

Well firstly we need to be clear on what the umbrella company is offering.  Umbrella companies will usually offer both an employed and a self-employed model and it depends on which model is being offered to a worker and an employer as to what the benefits are.

On the face of it, an umbrella company offering employment can seem quite an attractive option for an otherwise self-employed construction worker. You get your money PAYE without having to worry about sorting out your own tax and National Insurance contributions. You don’t have to deal with CIS headaches and you benefit from the rights that are granted to employed people.

As the worker is technically paid PAYE and “working at temporary workplaces”, it was previously possible to claim expenses against your travel and subsistence costs. However, abuses of the system by some intermediaries led to HMRC bringing its foot down. Now, it’s a lot harder to qualify – and getting caught out cheating the taxman is a nasty business.

Without the travel and subsistence offset the PAYE umbrella is no longer advantageous to workers and actually against the rates they think they are getting costs the worker money!

From an employer’s perspective, the benefits can initially appear to include significantly lower costs over employing workers directly.  This is because they agree a rate of say £10 per hour so they think the worker is getting a good deal when in actual fact the rate is much lower as the umbrella has to account for employers national insurance and their margin out of £10.  However, the fallout over rates can be detrimental to business and create an unhappy workforce.

So in actual fact being self-employed is financially far more beneficial for the worker, as there is only the CIS deduction and at the end of the year the individual can complete a tax return, offset his expenses and quite often received a tax refund which is one of the areas that RIFT specialise in.

However, an individual being incorrectly classified as self-employed has far reaching implications for not only the umbrella company but also the employer as such they have to be incredibly careful that the people working on their sites are genuinely self-employed. With the changes in legislation HMRC now have more strings to their bow making employment status challenges easier for HMRC and are becoming increasingly common.  As always a judgement against you can be crippling.

Although umbrella used to serve a good purpose to offer protection to employers their relevance is somewhat out dated and they no longer offer the same protections that made them such a good solution in years gone by.

How does operating through an agency and getting paid through an umbrella affect my workers?

When you’re taking on workers via an agency, it’s possible that those workers are actually being paid through an umbrella company. The worker can get stung quite badly here. For example, if you advertise a job at £10 per hour, that rate is what the umbrella company gets, not the worker. A lot of the time, the first a worker will hear of this is when they see their first payslip.

This is actually part of a much larger problem, if there was more transparency over rates there would be far less for workers and unions to complain about and find fault with.

Construction Unions are opposed to umbrellas. Does RIFT Legal offer an alternative?

RIFT has always had a great relationship with UCATT, working with them to support their members both directly and through our relationship with HMRC. The confusion and misinformation surrounding umbrella companies and the crackdown on false self-employment are as bad for workers as they are for employers. That’s why we agree with UCATT that the ideal way to avoid the ugliness and dangers of employment status challenges is simply to engage your workers directly

Currently it is unfeasible that the entire workforce is directly PAYE as such RIFT Legal Services offers a full payroll facility for both PAYE employees and self-employed workers to make this process simple, efficient and cost-effective as well as indemnity against HMRC challenge.

Rift Legal Services will undertake a full assessment of the workforce to determine who can be self-employed and who should be employed.  Since there’s no intermediary in the employment chain, your workers’ employment status is much easier to determine and prove. You’ll also no longer have to pay VAT on their pay as you do with an intermediary.

Ideally, UCATT argues, all its members would be permanently employed. Until that becomes a viable option for both workers and employers, the safest route is to avoid intermediary firms like umbrella companies. With RIFT Legal Services, there’s never any question over a worker’s employment status, and full protection for the employer in the event of HMRC enquiries.

Getting your workers’ employment status wrong can be crippling to a business. A directly engaged workforce offers the best balance between security and flexibility in construction. Talk to RIFT Legal Services to find out more about how we can help.