Working through an umbrella company – updated guidance

HMRC has updated its guidance on working through an umbrella company. Recent changes to the off-payroll working rules (IR35) will have resulted in many former contractors becoming employed by umbrella companies.

An umbrella company is, normally, a company that employs a temporary worker (an agency worker or contractor) on behalf of an employment agency. The agency will then provide the services of the worker to their clients.

Most umbrella companies employ workers using an employment contract which will set out their terms and conditions. This means the company must comply with employment law.

If a worker is employed by an umbrella company, the tax rules on agency workers and off-payroll working (IR35) will not apply to that worker.

The umbrella company will pay the worker for the work they do for the employment agency’s clients and deduct any income tax and employee National Insurance contributions due under PAYE from their pay.

The end client pays the agency for the worker’s services. The agency deducts a fee for placing the worker with the end client and pays the rest of the money (sometimes known as the assignment rate or the limited company rate) to the umbrella company.

HMRC’s guidance has been updated to show how umbrella company workers are engaged. It has new sections to help workers understand their pay and employment rights and check that their tax and National Insurance is correct. Please also see our earlier Bulletin Working through an umbrella company for more information.

Currently, there is no means by which umbrella companies themselves are regulated, as employment agencies and employment businesses are. Although as employers they are still required to comply with wider employment and tax law.

If a non-compliant umbrella company causes detriment to a worker, the Employment Agency Standards (EAS) cannot take enforcement action on behalf of the worker. It would be up to the worker to enforce their rights via an employment tribunal.

The Government therefore published a consultation last November, the intention being to bring umbrella companies into scope of the framework that regulates employment agencies and employment businesses which is currently enforced by the EAS. This will require primary legislation. Please see our earlier Bulletin. The evidence gathered through this consultation will inform the ongoing policy development of potential options aimed at better protecting workers. It is intended to ensure that the Government is developing regulations based on the most up to date market practices. Future regulations will aim to protect workers’ rights and continue to allow businesses to operate flexibly. We await the outcome.

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