Cowboy or compliant? How to spot a straight-shooter umbrella company

As April 2021’s private sector IR35 reform looms with real intent, more and more ‘umbrella companies’ are appearing on the scene but, asks Lucy Smith of Clarity Umbrella, how can you tell which is a ‘cowboy’ who may leave contractors at risk and which is genuinely compliant?

The easiest and most simple way to ascertain a legitimate umbrella is by their take-home pay quotation. We’ve all seen it stated so many times that any take-home maximum should be pretty much the same from any umbrella, assuming you are comparing like-for-like figures.

Call the shots

So when you are requesting a quote, always make sure you are clear on how you would like them to quote. If you look at a monthly figure, some take into account you working 20 days per month (working 5 days per week for 4 weeks a month), some will look at 21.6 days per month (ridiculously, as this assumes working 52 weeks of the year), as a way to increase that all-important take-home figure. Anything over around 58% for a 40% rate taxpayer should give cause for concern based on a standard 1250L tax code. But for your potential  brolly to produce the breakdown you want, ask yourself the following and tell them your preferences:

• Do you want them to consider pension; auto enrolment or additional pension funds?
• Are you on a standard tax code, or do they need to consider the calculation on another code?
• Do you wish for them to take into account any accrued holiday figures?

Once you have a like-for-like comparison, you can then see that give or take a few pounds, the figures should be very, very similar.

Let’s also look at this logically. If you are a 40% rate taxpayer and they are offering you more than 60%, ask them why! If you are a 20% taxpayer and they are offering you more than 80%, then there is also something wrong! As a rough estimate, keep in mind that someone who pays tax at 40%, can look to net anything from between 52% and 56% of their day rate.

Brollies under fire by the BBC

As mentioned earlier, there are many more companies coming into the market to try and take advantage of the changing market, some of whom were named in a Radio 4 probe after they targeted NHS workers trying to help in the Covid crisis.

So what are the other red flags that may give these hard-workers, and others, an indication that not all is as it seems? 

The Magnificent(ly telling) Seven

1. Do they mention any use of a ‘loan’ or a ‘scheme’? These terms were mentioned or implied in the radio investigation.
2. Are they secretive about how you can achieve the higher take-home, promising only to ‘reveal all’ once you are registered with them? Both 1 and 2 here are must-asks for contractors who approach umbrellas ( or companies claiming to be an umbrella company), as every legitimate umbrella should have nothing to hide -- and should be able to provide a full breakdown of PAYE and NICs figures. Remember, for legitimate umbrella companies, the ONLY part of what you’ll payout which they get to keep for themselves is the rather minimal margin which is charged (genuinely) for the set-up and processing of your contractor assignment and the payroll.
3. ‘QC-Approved.’ A claim that some ‘umbrellas’ or providers make that’s not really worth the paper it’s printed on! What the umbrella won’t point out to you here, is that it is only that single QC’s “opinion.” Yes, it’s a legal one and all that, but it could very well be challenged in a courtroom.
4. Any frills or add-ons. Beware of these because the plain reality is that a genuine PAYE umbrella company is essentially a tax collector for HMRC. We process funds and report them direct to the Revenue via RTI. Oh and worth noting -- HMRC has done a fair amount more joined-up thinking on the brolly frontier in the last few years, and the introduction of the ‘Agency Reporting Requirements’ means that tax officials can see the funds as they pass down the chain. So if anything goes missing, you can bet that they are a little more on top of this than once upon a time.
5. ‘HMRC-Approved.’ As the UK’s tax authority, the Revenue doesn’t approve anything. So like ‘QC-Approved’ this sales-speak means absolutely nothing; even less as it doesn’t even exist!
6. ‘EAS-Approved.’ Contractors should note that it has been officially indicated that the Employment Agency Standards Inspectorate (EAS) have been passed the remit to provide some kind of regulation for the umbrella industry. This stems from  a recommendation in the Taylor Review. But at the time of writing, there’s nothing concrete. In an ideal world, this oversight of umbrellas by the EAS would be introduced prior to the April 2021 reform, but given the current state of affairs (notably Covid-19), this may not happen in time.
7. Finally, check your prospective umbrella company’s registration number and where they are based. Google is an amazing tool nowadays, and has many a time come to the rescue of the unsure, letting them see interesting links to companies overseas, particular those located within tax havens.

As to what contractors do want to see in an umbrella company before signing on the dotted line, some kind of email update or regular newsletter showing proactivity on the compliance front can be reassuring. Let’s get one thing clear – compliantly running an umbrella company is not a simple task; there are complexities of tax law, contract law and employment law; none of which sit comfortably together, so remaining compliant is an ongoing operation. 

Just because they have a badge...

Over the last year, we have seen many agencies opt for the “accredited umbrella companies” which, similarly, should provide some comfort to the contractor / employee, in knowing that the business has been assessed by another company. However, the agencies should also be performing their own ‘due diligence’ on the umbrella. But the audit is only valid at that point in time -- when the data has been taken, so what happens in practice, or subsequent to the audit, could change and deviate from that gold-star review. 

So what else do you need to ask or look-out for, to tell if you’re going to be riding out with the right umbrella outfit?

The Magnificent Seven (Ride Again)

1. Does the umbrella employ you under a contract of employment? (Good)
2. Do they perform a Right to Work check on you in line with the Home Office Guidance? (Good)
3. Do they provide you with a payslip each time you are paid that shows PAYE, NICs and pension payments? (Good)
4. Is their margin fixed, or a percentage? At the end of the day the umbrella is performing the same work for you whether you earn £13 per hour or £100 per hour, so the charges should be the same.(Good)
5. Are they going to ‘payroll you’ as soon as the funds hit their account? (Good) 
6. What happens to any unused holiday pay accrued; is it absorbed by the umbrella? (Bad; Ugly)  N.B. Such pay must come back to you at payroll year-end, and not swallowed by the umbrella if it goes unused.
7. Are they charging you for SSP? (Bad, Ugly). This has to be funded from the profits of the umbrella and if charged to the contractor / employee, would be deemed an unlawful deduction of earnings.

Often, your contractor recruitment agency will have run some ‘due diligence’ checks on the businesses they engage with.

High Noon

But you should run your own checks too. Do your research, check out reputation and always pick up the phone and ask them direct if unsure.

Don’t squeeze the trigger if it’s someone who cannot explain every aspect of their ‘umbrella’ outfit to you. You want to holster them and go with a straight shooter – an umbrella that satisfactorily answers all your questions about compliance. With a taxman himself returning to the saddle, you should seek out the brolly which demonstrates to you that they are fully compliant, both in their operation and in handling your loot. Make sure you choose the bonafide, not the bandits!