Government must realise, thousands of workers in umbrella companies are employed against their will

There are a lot of findings we’ve seen contractors visibly nod their heads in agreement to since we released our research on umbrella company satisfaction – or ‘dissatisfaction’ as is more likely to be the case if you use a brolly since IR35 was reformed, writes Andy Chamberlain, policy director at IPSE.

'We don't believe you on IR35'

One such finding from our Q1 2022 survey of 584 contractors is that despite self-employed professionals being forced to operate via an umbrella company, almost six in ten umbrella company workers said they believed their role was actually outside IR35.

Perhaps we shouldn’t be too surprised. Experienced contractors have been dealing with IR35 for over 20 years. Many of them have taken great care to understand the rules and ensure their contracts and working practices are compliant.

Their private sector clients, on the other hand, have only had to think about IR35 in the last 12 months! And they, in many cases, have been risk-averse. It is not at all uncommon, therefore, for the more knowledgeable contractors to disagree with their client’s determination.

Umbrella contractors are challenging 'inside' decisions, despite the ensuing mess

With all that IR35 nous under their belts, it stands to reason that contractors are challenging the client’s IR35 status determination and nearly 1 in 5 are getting them over turned. We know this from our ‘Taking Stock’ report, published last autumn. (N.B. Some 79% of umbrella contractors were unsuccessful at challenging the determination).

On a practical level, it’s fascinating to think about what this means in practice i.e. a client says IR35 applies, the contractor goes through a brolly – but later the contractor challenges the role’s status,  only for the client to come back 45 days later agreeing ‘IR35 doesn’t apply’.

In that 45-day period (enshrined in IR35 legislation) it’s highly likely the contractor will have received at least one payment from the umbrella and paid the tax. But then, the contractor leaves the brolly and invoices the agency / client directly. You can probably see why such challenges by brolly contractors won’t be encouraged – they invariably create some administration hassle for all involved, not to mention complicating the tax position for the contractor for that year. Nonetheless, we imagine that this activity is indeed happening.

The PSL problem

What’s also happening is quite a bit of objection to PSLs – there’s even an official petition.

Our own objection to Preferred Supplier Lists stems from concerns around the lack of transparency in these arrangements.

We are concerned that contractors are pushed towards a certain umbrella because there is a financial incentive for the agency, and not because it is in the interest of the contractor. PSLs should only exist to ensure compliance.

Umbrella contractor holiday pay pangs

Another compliance issue on our mind – even if it wasn’t flagged up in our research – is umbrella company holiday pay.

Let’s be clear. Compliant and ethical umbrella companies are operating in the contractor market in 2022 and that means, such brollies are taking steps to ensure holiday pay reaches the worker’s pockets. As it should do.

However, there are some unethical, and possibly illegal methods reportedly being used by umbrella companies to withhold holiday pay from contractors. These include not providing the contractor with due notice that unclaimed holiday pay is about to expire, maintaining restrictive policies for claiming holiday pay, and clawing back all holiday pay at the end of an assignment. We believe this is an area where greater transparency is also needed.

Our message to ministers is this...

Finally, a message to the government. IPSE strongly believes that it is in the interests of all parties – the contractors/workers, end-client organisations, recruitment agencies and the umbrellas themselves – to get the umbrella company market regulated as soon as possible. The IR35 changes have meant that tens of thousands more individuals now work in an umbrella arrangement and a great many of these individuals simply don’t want to be there. The least the government can do is ensure those umbrellas are operating compliantly, transparently and in the interests of the workers.