Crystal Umbrella

Contractors working through umbrella companies may be interested in recent research charting the effects of the recession on the freelance jobs market.  Recent studies by PeoplePerHour.com, Europe’s largest online jobs marketplace, and leading HR group, the Chartered Institute for Personnel and Development (CIPD) both suggest that as permanent posts disappear, freelance opportunities are rising.

PeoplePerHour.com’s study confirms the earlier findings from the CIPD research – work that had previously been kept in-house, especially in the public sector, is increasingly being outsourced to contractors.  More than 120,000 freelancers regularly scour the 70,000 plus jobs advertised on the PeoplePerHour.com website.  And, PAYE umbrella contractors take note, a fair proportion of those jobs were once available only as salaried posts in the public sector.

During 2010, the body count of salaried jobs axed from the public sector in the wake of government spending cuts reached a staggering 132,000.  But data from PeoplePerHour.com suggests that, for example, digital projects once kept in-house in public sector organisations are now being outsourced as never before: the number of digital job postings appearing on the site leapt by a breathtaking 315 per cent over the last year.

The switch to increased use of freelancers by public sector organisations is a relatively recent trend, at least when compared to the private sector, which turned to contractors swiftly when the recession started to kick in, cannily saving the additional costs associated with hiring permanent employees.

However, a worry about these trends is that saturation point may not be too far off – without truly substantial economic growth, and more public sector cuts on the way, the freelance jobs market could well start feeling a little overcrowded.

The UK’s umbrella companies and limited companies may be amongst the many small enterprises suffering from discriminatory and unfair banking practises, according to former Liberal Democrat Treasury spokesman Lord Oakeshott.

Lord Oakeshott was speaking after data from the Bank of England revealed massive discrepancies between interest rates paid by small companies and big firms. The figures show that a large company borrowing £20 million will generally be required to pay an interest rate of around 1.78 per cent, whereas SMEs are generally required to pay a stinging 3.69 per cent on a far smaller amount (£1 million).

These discrepancies make a mockery of attempts to solve the UK’s lending crisis, Lord Oakeshott believes, and suggest that the banks are choking the prospects for economic recovery rather than enhancing them. He urged the coalition to put immediate pressure on the banks if it truly wants to help small firms lead the recovery – many, he fears, will seize up entirely unless the government acts.

Net lending to UK firms has actually been falling significantly in recent months, according to the British Banking Association, which recently produced figures showing that it fell by £4.6 million in February and by £4.7 million in March. In response to these trends, some expert commentators, such as business strategist John de Groot, have advised small firms to explore other ways of obtaining finance, including approaching friends and family.

Lord Oakeshott’s comments will strike a chord with many SMEs; whether the government has the influence to make any impact on banking practises, however, remains open to question.

HMRC has decided to offer an amnesty to umbrella companies using Employee Benefits Trusts (EBTs) to boost their clients’ take-home pay, just months after announcing that it would shut the schemes down.

Provisions in the Government’s Finance Bill of 2011 squashed the offshore tax loophole exploited by EBTs, resulting in several major PAYE umbrella firms scrabbling around to restructure their organisations, leaving many of their clients out of pocket in the process. Umbrella companies were not the only firms to use EBTs, of course; several other high-profile businesses used the scheme to provide tax-efficient financial enhancements to their employees. One such – Ranger FC – is currently under investigation following the HMRC clampdown.

In a new press release, however, HM Revenue has announced that it now intends to allow companies an amnesty in order to repay outstanding NICs and tax. The statement said:

“HMRC is inviting employers, companies and other users of these arrangements to settle without recourse to litigation. This will minimise costs to both customers and HMRC. Employers and companies concerned with how their arrangements will be affected by the new legislation can respond to this opportunity to obtain certainty about their tax liabilities.”

HMRC’s Permanent Secretary for Tax, Dave Hartnett, maintained that the revenue would seek to resolve disputes without proceeding to litigation wherever that could be achieved within the law and “without damage to the Exchequer.” He revealed that HMRC was adopting a “proactive approach” to give customers a chance to work in partnership with the revenue and “establish how the facts of their case fit within the proposals.” He encouraged customers to come and discuss their situation.

Umbrella companies and other employers will be required to automatically enrol their staff in a pensions scheme from October 2012 under new Government legislation. Even firms employing temporary workers for over 12 weeks will be obliged to adopt the same rule.

The Recruitment and Employment Confederation (REC) and National Employment Savings Trust (NEST) will attempt to clarify any confusion about the new rules in a workshop on May 17^th, which is free to all REC members. The organisation’s Head of Policy, Gillian Econopouly, billed the workshop as “an excellent opportunity” for members to understand what the new auto-enrolment reforms mean for them.

A major challenge that recruitment agencies may face when the legislation comes into force will be “churn:” around a million temporary workers are engaged on assignments at any one time in the UK, many of whom frequently change not only assignments but, on occasions, recruitment agencies in the normal course of events.

PAYE umbrella contractors whose company uses the same recruitment agency to find successive placements may be less affected by the reform, but large numbers of temporary workers are expected to want to opt out after their recruitment agency has enrolled them – a process which will be exceptionally time-consuming for recruiters who will find themselves constantly enrolling and un-enrolling staff. The REC has submitted its response to the Department of Work and Pensions consultation concerning the reform, warning that the additional bureaucracy will draw recruitment consultants away from their primary task of helping candidates find work opportunities.

Writing in Shout99, contractor expert Rob Crossland suggests that well-run umbrella companies have little to fear by the new Agency Workers Rights (AWR) legislation.

With relatively short, one-off contracts with end-clients lasting up to 12 weeks, the existing umbrella model can continue to be used, Mr. Crosland advises, but adds that such arrangements are “extremely unusual” for most PAYE umbrella contractors. More typically, umbrella workers take longer contracts, he continued, and under AWR regulations this may involve agency workers becoming permanently employed by their umbrella company, which would then be responsible for providing pensions, holiday pay and pay between assignments. Umbrella companies would need to work very closely with recruitment agencies to ensure their contractors find new assignments with minimal delays.

This “full employment model” legitimately escapes the AWR rules that grant agency workers equal pay with permanent staff, an arrangement designed to assist lower paid temporary workers. Instead, contractors would be classified as permanently employed by their umbrella company, rendering the protection afforded by AWR superfluous: such contractors would already be considered protected by employment law (by, for instance, receiving pay between assignments). A permanent contract of employment with the umbrella company would, however, need to be in place, Mr Crosland warns.

Many well-run umbrella companies are already adopting this model, Mr Crosland suggests, “using robust over-arching contracts of employment with contractors to mitigate the risks faced by recruiters and their end-clients when using a contingent workforce.” He suggested that the term “umbrella company” may soon become outmoded as a consequence, becoming replaced by “outsourced employment services provider.”

Contractors working through umbrella companies may be interested to hear that HMRC is to go ahead with a “real time” reform of the PAYE system.

From October 2013, it will become mandatory for employers to supply HMRC with information concerning income tax, national insurance contributions (NICs) and student loan payments every payroll day, rather than in accord with the current annual system. HMRC maintains that the new system will be much more accurate, making it easier for individuals to pay the right amount of tax after changing jobs. The P45/P46 process will ultimately be rendered obsolete under the new system.

Employers would, HMRC claims, benefit from a greatly simplified end-of-year PAYE reconciliation process. The current uncertainty which leads to errors in tax credits would also be largely abolished.

HMRC has announced that a pilot scheme involving software developers and volunteer employers will be launched in April 2012 following a period of consultation. Measures to ensure data quality will be introduced in October this year, with the aim that employers begin using the new system in April 2013 (it becomes compulsory in October of the same year).

The introduction of Real Time information will improve the PAYE system and, according to the Treasury’s Exchequer Secretary, David Gauke, make it “more accurate for taxpayers and easier for employers and HMRC to administer.”

HMRC spokesperson Stephen Banyard insisted that agency payroll providers and employers had been listened to, and plans have already been amended to take account of concerns raised. He urged anyone interested in being involved in the new pilot to contact HMRC.

Umbrella companies supplying professionals in the IT skills market are set for a bumper year in the London area thanks to the 2012 Olympics, according to the specialist IT recruitment company Langley James.

The firm’s founder and director, recruitment expert James Toovey, says that the city’s hosting of the games in 2012 should lead IT professionals across the UK to consider a move to the capital, at least temporarily. IT contracting in particular is likely to experience a major boost in demand, with the Olympic and Paralympic Games generating a major surge in short-term IT jobs ideally suited to freelancers.

Although IT job opportunities of all types will rise, IT specialists looking for short-term contractor posts are likely to be most in demand, he added. The sheer weight of the workload required to get the show up and running on time will feed this demand, as will the amount of time being taken off by people during the Olympics event itself. Temporary vacancies will have to be filled by adequately skilled and qualified staff.

IT professionals sticking to the permanent model of employment will not benefit nearly as greatly as temporary contractors, however, warned Mr Toovey, even though some long-term new ventures will start up on the legacy of the event. Mainly, short-term contractor posts will be available largely because of IT staff taking time off to view the Olympics.

If ever there was a good time for IT professionals to consider a switch from permanent roles to PAYE umbrella contracting, this is very probably it.

PAYE umbrella contractors may be amongst those to benefit from the new private sector-led “Start-Up Britain” initiative to support prospective entrepreneurs. Aimed at delivering the best possible support and advice from established entrepreneurs to startup companies, the project is a response to the Government’s call for an “enterprise-led recovery.”

Promising to champion the 270,000 new businesses staring up every year in the UK, Start-Up Britain could help generate new work for freelancers on contractor payroll as small firms adopt the growing trend for flexible workers rather than permanent staff. It has received warm endorsements from Prime Minister David Cameron and the Confederation of British Industry (CBI).

The initiative will provide new entrepreneurs with expert support worth £1,500 and is committed to promoting entrepreneurship within every school in England and creating Enterprise Societies in all UK universities. It has attracted the backing of several major international brands so far, including Virgin Media, Microsoft, Intel, Experian, BlackBerry, Barclays and McKinsey and Co.

Talking to the contractor news outlet Shout 99, Mr Cameron said that there were thousands of people in the UK who were entrepreneurs but just didn’t know it yet. There are, he insisted, “millions of success stories that haven’t been written yet.” He urged people who had been turning over good ideas in their minds for years to seize the opportunities offered by Start-Up Britain and “make it happen” to drive the economy forward.

The CBI’s Head of Enterprise and Innovation, Dr Tim Bradshaw, was equally positive, saying that the initiative could encourage more young people to become “business-savvy.” Providing extra support for entrepreneurs could, he believes, “inspire more people to take the plunge and start a new business.”

The PCG has recently issued a warning to contractors working for umbrella companies who think they may be receiving an employment benefit trust scheme, or EBTS.  The government has instructed HMRC to clamp down forcibly on these schemes, which are now considered to be forms of disguised remuneration.

Even if your umbrella service claims to provide a “safe, secure, fully compliant, HMRC-approved scheme offering over 90 per cent net income retention,” you should beware.  The claim is not only false, it’s now illegal, too.

EBTS and a closely-related product (employer funded retirement benefit schemes, or EFURBS) have been popular amongst high-earning freelancers of all kinds, from football stars to entertainers to high-end consultants contracting in the IT skills market, or the banking and financial sectors. Essentially, they divert some forms of regular income (or large bonuses) into “loans” which are taxed at minimal or zero rates. In our straitened economic circumstances, HMRC has closed these tax loopholes in order to haul in an extra £500 million per year in additional revenues.

A few large corporations and a small number of individuals may comply with new rules and continue to befit from the schemes, but HMRC estimates that upwards of 50,000 “employees” will no longer do so, as from 9^th December last year. To compound matters, the new legislation doesn’t come with a cut-off date, unlike most other tax schemes, which means that it is by no means impossible for EBTS and EFURBS in place before the 9^th December to be included.

The PCG is urging all who suspect that they or a colleague may be directly or indirectly involved in such schemes to seek swift advice from an independent expert.

Contractors working through personal service companies may be intrigued by critical comments from an expert concerning a key proposal in the recent OTS Small Business Tax Review.

The document continues to provoke controversy, with a leading staffing organisation now claiming that one of its central recommendations – the integration of income tax and National Insurance Contributions NICs) – is likely to deter people from considering self-employment or freelancing as a career path.

The Association of Professional Staffing Companies (APSCo) insists that the proposed realignment of income tax and NICs to reduce the present differential between self-employed and employed workers will effectively sabotage the very goal the Government has set so much store by: the encouragement of self-employment. Under present arrangements, self-employed contractors working through limited companies will pay around 15 per cent less tax on their income than employed workers if they pay themselves by dividends. They also pay less in the way of National Insurance Contributions.  The OTS considers this unfair on employees, and thinks the different rates should ultimately be abolished. This would remove the need for IR35 regulations, according to the OTS.

But APSCo considers the proposal to be a retrograde measure which will make contracting considerably less attractive by removing the tax incentive that encourages people to become self-employed in the first place. It would also, the organisation argues, drive employment costs up by millions of pounds.

APSCo’s Chief Executive, Ann Swain, said that limited company contractors were a “vital component” of the UK’s flexible workforce. Changes to IR35 which resulted in deterring people from considering contracting would simply drive up employment costs without generating the economic growth that small businesses are known to deliver.