As a contractor, you may have the option to either work via your own Ltd company or you may be asked to work via an umbrella company. With many so called “umbrella companies” in the marketplace, how do you know what to look out for? We spoke to Lucy Smith, Managing Director of Clarity Umbrella who shares the importance of choosing a compliant umbrella company.

If you pick up an inside IR35 assignment, then the agency or end-client may specify you need to work via an umbrella company, so it’s important that you’re comfortable with the assignment rate that you engage on before you start agreeing to any contractual arrangements. Then, request a take home pay illustration so that you can see all of the deductions coming from that rate, which includes deductions of Employer’s National Insurance, Apprenticeship Levy and the umbrella margin – this will take you to your taxable salary which is then subject to Employees’ National Insurance and PAYE taxes.

On the positive side, when working via a “compliant umbrella”, all your tax and NI liabilities will be taken and paid across to HMRC at source through the payroll.

You, the contractor, are ultimately an employee of the Umbrella Company, that means payment comes directly from them instead of the end client which is what would happen when working through your own Limited Company.

However, no matter the industry you’re in, when looking for an umbrella employer, it is recommended to do your due diligence to ensure you are working with legitimate and authentic companies, so as not to put yourself at risk of investigation from HMRC. With an Umbrella Company there are several important things to look out for.

Carrying out some simple checks on their compliancy will be very much to your advantage in the long run. So, let’s break it down for you.

What does the term ‘compliant’ mean when referring to an Umbrella Company?

A compliant umbrella company will offer all the same statutory elements that any employer would, including employment rights, pension, sick leave, holiday, and maternity pay. The main benefit of this is that when, as a contractor, you are moving between projects and/or clients, your employment history is continuous.

What are the things to check to see if you are engaging with a compliant umbrella company?

• They will have legitimate accreditation such as the Freelancer & Contractor Services Association (FCSA). This is recognised as the industry’s compliance gold standard as accredited members can demonstrate the highest standard of compliance in the professional services sector and are independently audited. As they go through stringent testing for tax, employment and contract law, choosing an umbrella company that is FCSA recognised minimises your risk. Other accreditations to look out for are Professional Passport and The Association of Professional Staffing Companies (APSCo). Some Umbrella Companies will use fake accreditation badges so be sure to check them out, don’t just assume if they use an accreditation badge that it’s real! Authentic badges will usually take you to a link or profile on that website. If not linked, do a simple search to see if you can verify its authentication.
• They have been recommended by a legitimate business, such as an accountancy services firm, or are on a preferred supplier list, most commonly this occurs when securing your latest contract through a recruitment company. Although this may not be failproof, and over the years some agencies have been caught under POTAS (Promoters of Tax Avoidance Schemes) for including companies that have not been checked properly.
• They have gained a reputation for their credentials through authentic reviews. We all look at reviews for anything else we do, be it shopping or holidays, so of course it shouldn’t be any different when engaging with a company that is in effect managing your finances. If you can be confident that other contractors have had a good experience with an Umbrella Company, and they have presented them with no issues with HMRC, their compliance has been tried and tested.
• They offer full transparency on payments, so you can see exactly what they are doing with your money; from assignment rate all the way down to the net pay. If they don’t offer full transparency, you can assume they are hiding something. The details of all your deductions should be shown in an illustration covering all tax obligations, and the agency should also provide you with a key information document explaining the way the rate is broken down. That way you can decide on the best Umbrella Company for you using facts rather than smokescreens.
• An accredited Umbrella Company will have a full set of audited accounts, that will be checked as part of an accreditation to prove their compliance, alongside the employment and contract checks.

What are the warning signs of a non-compliant Umbrella Company?

• If they are suggesting an inflated, take-home pay (with minimal PAYE) then the chances are they are putting you at risk through non-compliance and some form of tax avoidance. What they may be doing is failing to pay tax bills or mis-using employment allowance schemes, and you could be investigated by HMRC and face heavy fines. As a rule of thumb, anyone offering you 70% or greater take home pay is most likely operating a tax avoidance scheme, placing you at risk.
• If they are unable to provide a normal employment contract direct with a UK based company, this could suggest they are operating some sort of tax avoidance scheme.
• The umbrella company is your ‘employer’ and should take care of all your tax, NIC’s under the PAYE system. You need to be able to trust that they are meeting all of your tax obligations (before you receive your take home pay), otherwise they are putting you at risk legally. At the end of the day it is your personal tax liability, so if something is not working properly then HMRC will come knocking on your door.
• If any of the directors are linked to a company on the HMRC blacklist, you should avoid them! It’s hugely beneficial that HMRC have started a record of the schemes that have been closed down, that way you can see who is behind these avoidance schemes and stay well away from any linked companies.
• If they show signs of being a “Mini Umbrella Company”. Known as an MUC, this could pose a serious threat to you. A legitimate Umbrella Company involves just one Ltd company with an employment contract between you and that business. A Mini Umbrella Company will move contractors between a series of multiple limited companies, created with one ‘promoter’ and creating layers within a supply chain. By doing this they attempt to abuse government incentives with the Employment Allowance for small businesses to benefit from the £5,000 National Insurance bill reduction.

Some of the key ways to spot a Mini Umbrella Company is if the directors are foreign nationals as this would suggest they don’t have experience in the UK labour supply chain and are unlikely to have directorship with any other UK business. Also, check if they frequently move contractors between different MUC ‘employers’ and likewise if the business has only been running for a very short time with changes in directorships who are usually resident overseas. These mini companies often last less than 18 months as they keep their activities hidden by setting up and subsequently dissolving companies in a short amount of time, before setting up a new one again and doing the same.

Our Ask Integro article can help offer further guidance from our qualified accountants: Mini Umbrella Companies – Why are they promoting higher take home pay?

Integro Accounting’s recommended Umbrella Company

A good Umbrella Company is an excellent way for contractors to build up their employment history as they reap statutory employment rights and benefits, which can make applying for a mortgage or loan a little easier than if you are operating via a PSC (Personal Service Company). It’s imperative, therefore that you choose a reputable, accredited, transparent, and upfront Umbrella Company. That way, you can be confident that you can concentrate on your assignment whilst they make sure you are paid correctly and in line with the UK PAYE rules.

Here at Integro, we don’t run our own Umbrella Company, but we do work with a 5/5 rated partner – Clarity Umbrella, who are fully FCSA accredited. They have no sign-up or exit fees and offer same day payments as standard. In addition, should your circumstances change whilst working through your own limited company, you can use our EasySwitch service which allows you to switch between limited or Umbrella at no extra cost.

Here, we have more information about Clarity Umbrella, and, as ever, if you want more information regarding Umbrella Companies in general or to talk things through before appointing one, here at Integro we’re always delighted to help.