On the 6th April 2014, legislation was recently introduced to stop what’s referred to as ‘false self-employment’. This has affected thousands of people who used to work through CIS whereby they worked as a sole trader whilst relying on an agency to find them the work. This means that they will have paid income tax and Class 2 and Class 4 National Insurance Contributions.
Since the legislation came in agencies would have to take the contractors’ on to their books and pay them PAYE if they could not prove that there was no supervision, direction and control (or the right of) over you as a worker. Rather than take on the position of employer some agencies are referring workers to an umbrella company.
The change has caused a significant stir in the industry and we are consistently being questionned by contractors as to why “umbrella companies” are scamming the contractors out of money! So let’s take a look at what we are being asked:
“I worked for a company and I got paid through an umbrella company PAYE . I. had previously worked on contracts in construction as self employed sole trader which I am registered with HMRC since 2007. My question is why do umbrella companies take employers N.I. contributions from the worker. I don’t mind working PAYE. But it seems the worker gets clobbered . First loop hole the umbrella companies midway to include a percentage of the workers rate as their holiday pay. When HMRC brought in .IR35 The umbrella companies put workers on PAYE covered holiday pay as above but the they take Employers. N.I. from the worker. How can HMRC allow this. Or even condone it. Some umbrella companies try cover it through. Tax compliance regulations or change the deduction heading on payslip or invoice. Ask HMRC about it and they say it’s fine. They can do that. How can it be oh and the sucker punch is we pay the umbrella company a fee for the privilege.”
We put the question to Zeeshan Anwar, our Compliance Manager, to see what he had to say.
“Thank you for your question. I am well aware of the way in which legislation, designed to combat what has widely been described as “false self employment”, has impacted on those of you in the Construction Industry and my personal view is that both the industry and recruitment agencies could have done much more to soften the impact.
As far as I can see, overnight your tax status changed from self employed to employee but neither the construction companies nor the agencies were prepared to employ you direct. Instead, with little or no explanation of the costs involved, many construction workers were directed to Umbrella Companies. So the change happened at no cost to the construction companies, no cost to the agencies and conveniently umbrella companies have been widely portrayed since as the “villains”.
In an attempt to help construction workers I, personally, have attempted to open a dialogue with UCATT without success so I hope I can at least demonstrate to you that we are certainly not the “villains” in this episode.
By directing workers to umbrella companies both agencies and construction companies were aware of the fact that someone was going to have to pay Employer’s National Insurance contributions and you might think that one or both should have increased rates to compensate. As far as I can see the construction companies continued to pay the same rate to agencies and the agencies continued to pay the same rates to umbrella companies as they had been paying to workers.
Now I cannot comment on other umbrella companies but I can explain what happens when a construction worker becomes an employee of Contractor Umbrella Limited. As our employee the worker has full employment rights but what is different is that there is no longer a contract or agreement between the agency and the worker, the contract or agreement is between the agency and Contractor Umbrella Limited for the services of the worker. So each week or month Contractor Umbrella Limited will invoice the agency for work done at the rate shown in the contract or agreement with the agency and if that rate has not been increased then the amount received is the same as the amount that the worker used to receive.
The amount may be the same but it now has to be treated very differently to how it would have been treated when paid direct to the worker. Firstly all UK employers, including umbrella companies, are required to make payments each month to Her Majesty’s Revenue and Customs (HMRC) for Employers’ National Insurance Contributions. Currently this contribution is taken as a percentage of 13.8% of earnings over £153 per week so that contribution and our margin (currently £28.50 per week) has to be deducted from the money received from the agency. The remainder will be paid to the worker, our employee, as a salary which will then be subject to deductions for income tax and employee’s national insurance contributions.
You mention holiday pay and here again all employers have to provide a statutory entitlement to holiday to all their employees and currently this entitlement is 28 days per year. Here at Contractor Umbrella Limited we make a deduction from the worker’s salary which is paid back at a daily rate when the worker logs holiday. Any balance is paid back in full to the worker at the end of each financial year.
As I said at the outset I well understand how you must feel about the effect that the legislation has had on you but I hope you can now accept that none of the blame rests with compliant umbrella companies that have no option other than to act as the law demands.”
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