5 questions contractor recruiters should ask umbrella companies

Since the implementation of the revised IR35 legislation, an increasing number of recruiters have turned to umbrella companies.

Providing an easy middle ground where employers and contractors can work together without concerns about IR35 compliance, umbrella companies have become the immediate solution.

But, asks Kris Simpson, country manager at Cool Company, how do you know if you’re working with a reputable and responsible umbrella company?

Five questions recruiters should always ask before starting to offer work through an umbrella company, are as follows:

1. What solution do you provide?

Umbrella companies are typically a PAYE solution, and that’s what you want whether you’re a contractor or recruiter.

However non-compliant umbrella companies do exist. So to head off the prospect of tax liabilities and even penalties falling due on you, be sure to check that your umbrella company is operating a full PAYE solution where both Tax and NI deductions are made on all the income.

Some agencies may be happy to work under a different arrangement from an umbrella company, but please be aware that any ‘schemes’ have risks, and HMRC are quick to act with penalties. So the safest option is to choose a compliant PAYE solution. Nonetheless, it’s worth asking this open-ended question to see what their answer is.

2. Where is the umbrella company registered?

One of the reasons that umbrella companies came under such scrutiny a few years ago, is that they can be based almost anywhere globally and typically, they like ‘tax-friendly’ countries. This often meant that taxes were not declared in the UK and therefore workers were breaking the fundamentals of UK tax law. 

By ensuring the umbrella company is registered in the UK, you will be confident that your funds are being taxed in the UK and HMRC will be receiving your deduction payment, (assuming all other compliance checks are completed). So similar to question one, you’ve got an answer that you ideally want to hear (the UK), but again, try posing this open question as a follow-up.

3. Can you show me an example payslip?

You can tell a lot about an umbrella company by its payslips!

Payslips provide a full illustration of how contractor pay is processed and all compliant umbrella companies follow the same format.

Your payslip shows you the following -- as a minimum:

• Total invoiced amount
• Employers NIC deductions
• Umbrella company margin
• Your gross taxable pay
• Your NIC deduction
• Income tax
• Net pay

4. Are contractors employed by the umbrella company?

The term ‘umbrella company’ is today used fairly loosely in the temporary labour market.

So whether we like it or not, the term ‘umbrella company’ means different things to different people. But if you are working with a genuine umbrella company, contractors will be employed by them.

As a contractor, you will conduct work for your clients using the umbrella as an intermediary business to manage pay, contributions, and benefits. The umbrella will accrue or pay you your holiday in advance, hopefully based on whichever of those two methods you request.

Bonafide brollies also ensure that contractors are paid during times of ill health via the statutory sick pay system. This is hassle-free for clients; they can simply pay the umbrella and forget about sick pay nitty gritty!

5. Has the umbrella company been accredited by a professional body?

Although there is ongoing talk of change ahead in the shape of the still-evasive Single Enforcement Body, right now umbrella companies are unregulated in the UK.

This means that if you want to be absolutely certain about the security of your client’s details and your money, it’s a good idea to work with an umbrella company that has been accredited by a professional body, such as Professional Passport. Such an accreditation means the umbrella has been subjected to a compliance audit looking at the financial stability, employment contracts, and internal process to ensure that the workers utilising the umbrella (its employees) are not exposed to underhand practices in those key areas. And due to passing the audit at that specific time, the umbrella has been recognised as trustworthy by whichever external body carried out the audit/assessment. Although you do want the auditor/assessor to be worth their salt!

Lastly, try these fundamental five because they represent a sound start

By asking these five questions as a recruiter of contractors approaching an umbrella company, you are off to a sound start in finding out whether your clients and contractors can be confident that compliance is going to be adhered to. Just like your two contractual parties, you as a recruiter will want to know that your funds are safe, and getting the 'correct' answers the five fundamental queries outlined here will go a long way to ensuring exactly that.