Even the very best HMRC umbrella company guidance can only ever paper over the cracks

Busy contractors may not have noticed, but the government recently made a number of fresh updates to its ‘Working through an umbrella company’ page, which is the UK’s official guidance for contractors operating via umbrella companies, writes Fred Dures, founder of PayePass.

The umbrella guidance unpacked…

This HMRC-authored resource is designed to give workers a better understanding of how operating through an umbrella company works in practice – from providing further information on how you get paid, to advice about checking your payslip for the correct deductions.

A number of experts reacted to the updates positively, describing them to ContractorUK as the best official brolly guidance yet. I don’t entirely disagree.

However, the guidance is far from the finished article and, in my opinion, there’s a lot more the government could and should do to educate workers about working through umbrella companies in this day and age.

Clarity is better for everyone concerned

Let’s start with the positives, though. This was by no means a wasted exercise. After all, the more informed umbrella workers are about operating in this manner, the better.

While still relatively lightweight in my view – as the topic of payslips alone is complex – the improved guidance (which outlines what to expect on a compliant umbrella payslip) could help individuals spot the more obvious cases of ‘salary skimming’ and holiday pay withholding. And if it prevents just one worker from being short-changed on their take-home pay, then it’s been worthwhile.

As the HMRC guidance outlines, it’s vital that workers are able to question calculations in a payslip if something doesn't look right or something’s not understood. Payslips can intentionally be made unnecessarily complicated when an umbrella is taking more than it should.

A sign of the bigger problem

But the very fact that this guidance is still required is a sign of the bigger problem. This problem I’m referring to, of course, is the proliferation of tax avoidance schemes claiming to be compliant umbrella companies. These operators continue to lure in unsuspecting workers who, after being pursued by HMRC, can be left with devastating tax bills.

As many who read ContractorUK will know, the government is yet to deliver on its promise to regulate the umbrella industry, mainly because it has shelved the Single Enforcement Body.

But regulating brollies would be an important step in putting a stop to these dodgy schemes once and for all and, at the same time, it would help rebuild the tarnished reputation of the umbrella sector. It would also mean there would be less reliance on government guidance, which isn’t comprehensive enough by any stretch of the imagination. Bear in mind that, with umbrella working alone, we’re getting from the government not even 1340 words to cover the complexities of this increasingly common way to work.

However, that this guidance is lacking in certain areas isn’t necessarily a surprise. For whatever reason, the government hasn’t been tuned into the true impact of the key issues affecting independent workers – whether that’s umbrella regulation, tax avoidance schemes or the IR35 legislation.

The failure to focus on ‘skimming’ is lost on me

Also, the fact that salary skimming isn’t specifically referred to in this taxpayer guidance on umbrella company usage is lost on me. It’s no secret that this immoral and in some cases illegal practice – which occurs when an umbrella company skims money from each payslip that does not belong to it, pocketing millions in the process over time – is all too common in the umbrella market.

In this situation, every individual element of a contractor’s payslip can be doctored so that a skim can be taken. As a result, contractors must be incredibly vigilant and insist that their umbrella employers can fully explain and justify every deduction and calculation.

In recent months, several well-known umbrella companies have faced allegations of skimming. While the legality of it is up for debate in some examples, there’s no denying that it is totally unethical. Yet the government, in its current, commended guidance, has failed to address it directly, showing just how out of touch Westminster is with the most pressing issues.

Looking ahead

So where do we go from here? Well, I expect HMRC’s umbrella guidance to be tweaked, elaborated upon and gradually improved over time. And while helpful (particularly if ‘skimming’ makes it into a future update), if I’m totally honest, the guidance is just a case of papering over the cracks – ignoring the root causes of the problem.

The Spring Budget 2023 on March 15th provides the perfect opportunity for the chancellor and prime minister to up their game and show this vitally important sector that this administration is serious about making a difference.

In the meantime, the compliant umbrella companies – of which there are plenty I should add – must continue to self-regulate and demonstrate to workers, agencies and end-clients that they are safe to work through.