In my world, the term “self employed umbrella company” is a tad paradoxical. After all, a traditional PAYE umbrella employs their workers and provides (or should provide) the various benefits commensurate with employment (holiday and sick pay etc.).
So why is there such a buzz at the moment about the use of this relatively new trading structure and how does it differ from your average umbrella company?
Let’s take a closer look.
According to some of the early providers, a self employed umbrella company acts as a simple conduit between the worker and end client or recruiter. No difference between a traditional umbrella company I hear you cry!
Until of course you compare the treatment of tax. A PAYE umbrella company invoices the client / recruiter gross, deducts PAYE, employee’s and employer’s national insurance contributions. They also account for holiday & sick pay, pension contributions and maybe additional things like child care vouchers or gross charitable donations.
A self employed umbrella company does none of these things. Well, apart from the bit about invoicing the end client or recruitment agency. In fact, from what I can see, their entire business model is as follows:
1. Collect a timesheet from the self employed worker each week
2. Invoice client / agency gross (hours x rate) + VAT
3. Chase client / agency for payment
4. Once money is received, deduct their admin fee, and pay the self employed worker the gross balance
5. It’s then the responsibility of the worker to account for their own ‘self employed’ taxes (IT, class 2 & 4 national insurance)….but I could be wrong
It’s a pretty neat service and, after running an umbrella myself for several years, I can see the attraction of setting something like this up. The big USP of course being the fact Mr. contractor / self employed worker / freelancer or whatever you want to call him saves the employer’s national insurance contributions he’d ordinarily be paying with a traditional umbrella company. He’ll also pay proportionately less class 2 & 4 employee’s national insurance versus an employee’s class 1.
What I’m not totally clear on though is the self employed umbrella companies‘ liability for things such as MSC debt transfer or even IR35 for that matter. I’m also curious about how this structure sits with regards to the Agency Workers Directive. I may take a few weeks to chew on this and perhaps come back to you at a later date.
Until next time…
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Image: a great idea by Adriano Agulló
Dear Martin,
Hugo at Gabem pointed me to your article in “Umbrella Companies for UK contractors and freelancers” site, co-incidentally the very day I joined your site, Freelancesupermarket to test contractor feelings on the very same proposition.
I thought I would outline the proposition from a service providers point of view for your consideration and open the possibility of throwing it up for debate.
Re MSC, transfer of debt and IR35 arguments they don’t apply or, more correctly do, in the same way they apply to PAYE Umbrellas.
The proposition rests on an alternative interpretation of the IR35 section “provision of personal services through an intermediary company”.
The driver of IR35 is to “remove opportunities for the avoidance of tax and Class 1 National Insurance Contributions (NICs) by the use of intermediaries, such as service companies……. than that which would apply if the worker were to be taken on as a direct employee of the client”
PAYE Umbrella companies interpretation is that, by applying an “Over-arching” contract” each assignment is temporary and expenses including Employers NI can be deducted as a salary sacrifice prior to calculating Tax and NI. As you know, this has led to widespread abuse of expenses dispensation (at no risk to the umbrella, only the contractors) and has the unfair consequence to the contractor of inflating his rate by 12% Employers NI and any other benefit charge-ons.
I think this is tortuous. However, the Chancellor/HMRC must put contractors somewhere and PAYE Umbrellas are as good a solution as any to replace the MSC model they have legislated out of existence. It also makes it easy to increase revenue by disallowing certain expenses which is much quicker than legislation.
This puts contractors in the invidious situation of getting no employment benefits, security etc as would be accrued if they were employees and getting very little benefit from sacrificing these i.e why should a contractor pay the same as an employee if he/she gets none of the benefits.
Alternatively, if the client took on a self employed worker directly, the client would pay him/her gross and that worker would be responsible for their own tax and NI at the end of the year. The same rules should apply if the client takes on a self employed worker through an agency.
Is not the spirit of IR35 better followed by this model than the PAYE umbrella?
The model has all the benefits to the contractor mentioned in your article and, in addition, legitimises expenses claimed exclusively and necessarily in the performance of their duties. Also, an additional benefit accrues to the contractors/agencies/umbrellas/clients that self-employed workers are exempted from the forthcoming Agency Workers Directive thus considerably reducing costs.
We believe there are a large number of contractors and freelancers working through agencies that fulfill the HMRC ESI criteria for self-employed status but don’t do it because they cannot get work through an agency as a sole trader. It is these workers who are now offered this choice through a self-employed umbrella like ICSL.
There are many workers who work through agencies for flexibility and variety who would not want to take advantage of this, and these workers will stay with PAYE Umbrellas, however, we feel the choice should be there for those contractors for whom maximizing remuneration against risk is their raison d’etre for contracting in the first place!
I would very much appreciate any comments on this!