REUTERS | Russell Boyce

It’s raining again: are holes appearing in umbrella company arrangements?

In George Osborne’s Autumn Statement 2014 speech, he said that the government were going to consult on whether “umbrella companies” (not to be confused with umbrella contracts) were being used to deprive people of basic employment rights like the minimum wage, and avoid tax.

Umbrella companies are a type of managed service company and are used to employ an individual who either sources work directly with a client or through an agency. The umbrella company invoices the client for the individual’s services, then pays the individual out of that fee, and pays itself an administration fee for providing payroll services.

Historically, umbrella companies were used by self-employed professional individuals, many of whom were in the IT industry. It was a hassle-free way of providing their services to several different clients while not having to set up their own companies. They allowed the individual to benefit from a lower rate of tax, while deducting expenses including the costs related to commuting to and from work, or subsistence, even when attending a permanent workplace.

However, with companies moving towards an increasingly flexible workforce, umbrella companies are now being used by individuals who have not traditionally been self-employed. Evidence is emerging that workers such as teachers and even non-professional casual workers such as security guards are having to use umbrella companies as a condition of getting work. And while there have been tax advantages, it seems that umbrella companies not only deduct employee’s national insurance contributions (NICs), but also employer’s NICs, which not only seems counter-intuitive for these types of job but leaves the individual with far less than the headline rate quoted to them when they were offered the job.

This increased use of umbrella companies, and the circumstances in which they are used, has not gone unnoticed by the government or HMRC. The Finance Bill 2016 includes provisions limiting tax relief to workers under umbrella companies, and in anticipation of the Bill coming into force, HMRC issued new “interim” guidance with effect from 6 April 2016. The guidance states that if the worker is under the supervision, direction and control (SDC) of the end-client, each workplace that the worker attends is treated as a permanent workplace so that travel is treated as ordinary commuting and tax relief denied. If, on the other hand, the hypothetical contract between the worker and the end client would be one of self-employment, the new rules do not apply. In its guidance, HMRC acknowledges that “the increase in the use of employment intermediaries now means that a large number of workers are able to access tax relief that the majority of workers cannot, even when these workers hold very similar jobs.”

Aside from the obvious tax consequences for temporary workers, there is an important thing to note here: the government and HMRC can clearly see that these arrangements are not always used by the genuinely self-employed.

Where does that leave the employment status of these individuals? The basic premise is that these individuals are “employed” by their umbrella company, not by the agency who recruits them, nor by the end-client. But is that realistic? An umbrella company does not recruit an employee or dismiss them, in any meaningful sense of those words. It cannot performance manage them, or hear a grievance. Is it not possible that, in some jobs at least, the individual is actually an employee of the agency or the end-client? Employment law determines employment status by considering whether a contract of service exists. This will depend on many factors, not least personal service, control and mutuality of obligation. While recent case law (most notably Secretary of State for Justice v Windle and Arada [2016] EWCA Civ 459) suggests that employment status is becoming more difficult to achieve, it seems possible that an individual who HMRC considers to be under the “supervision, direction and control” of a client might also be the type of individual who qualifies for employment rights.

Despite George Osborne’s promise in his speech in 2014 that the government would look at whether umbrella arrangements are being used to deprive people of basic employment rights, this has not happened. The government has dealt with the tax avoidance aspect of these arrangements, and it no longer appears to be part of the current government’s legislative programme.

Until there is clarity on this from either the government or employment tribunals, clients and agencies might want to pray that it doesn’t rain.

Practical Law Employment Claire Templeton Dan Myers

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