When is an umbrella company not an umbrella?

If you read the tabloids, watch current affairs programmes or have an association with certain Trades Unions, you will no doubt have seen the term ‘umbrella company’ bandied about quite a lot just lately and not exactly in a glowing light. UCATT have declared that umbrella companies are ‘exploiting’ construction workers; The Mirror claimed that they are a ‘ploy concocted to rip-off construction workers’ and the Dispatches programme [19th January] dedicated much of their time to umbrella companies paying below minimum wage.

So is it all true? It all depends on how you define an umbrella company!

The traditional umbrella model caters to highly skilled, highly paid workers who opt to be employed through an umbrella company. This is opposed to operating through a Limited Company (or Personal Service Company). These individuals will work on a succession of assignments, typically in the IT, Financial, Banking and Engineering industries where their skills are greatly prized and required for specialist projects. The umbrella company will engage the worker under a full Contract of Employment. This means that they operate PAYE and the individual will be entitled to all Statutory employment rights.

Unfortunately, there are companies running completely different business models who are calling themselves umbrella companies! In doing so, have attracted the rather negative attention of the media and quite rightly!

So, how do you tell the difference between a traditional umbrella company and the sort of dodgy providers who are getting the Unions all bent out of shape?

If you see this type of advert:

“90% After Tax Umbrella Co – 100%. Compliant‎ Tax-Efficient Pay. Request Free Tax Illustration. QC Approved. Retain 90% of Your Income. 100% HMRC Compliant. Free to Set Up”

You will be looking at a tax avoidance scheme i.e. it serves no purpose other than to avoid tax. This type of scheme really, really upsets HMRC. And they are going to great lengths to make sure that contractors who use them suffer unspeakable torment.

If you see this:

“If your agency has minimum wage temporary workers then our Personal Relief (PR) Umbrella Model is for you. It’s fully compliant and meets HMRC rules. This has never been done with Umbrella services and can save ERNI!”

You will be looking at a scheme that will ask you to register as a sole trader (the minimum wage rules don’t apply). However, unless you are not under the supervision, direction and control of the end client the practice is unlawful.
Find out more here.

Umbrella Expenses

You may also find companies that will encourage you to claim for tax relief on ‘expenses’ even though you haven’t incurred any costs. This model is referred to as ‘pay day by pay day’ and has attracted the attention of the folks at HMRC (and not in a good way)
Find out more here.

There are many variations on a theme from these types of company but none of them will engage their workers under a true contract of employment which means that they have no employment rights whatsoever. They will undertake practices which will draw unwelcome attention from HMRC to their workers which could result in penalties and fines.

So the upshot of all this is – look for a proper traditional umbrella company; don’t be taken in by the imposters. As the media have rightly pointed out, they will exploit and rip off and generally make your life a misery!