Newly published official guidance on engaging with umbrella companies has been welcomed by the Freelancer and Contractor Services Association (FCSA) but also critiqued for not going far enough.

The guidance, released on 23rd August, states that most employment agencies and umbrella companies are fully compliant with British tax rules. However, it also refers to a minority who claim to be providing legitimate “tax efficient” arrangements that in fact keep more of a contractor’s income by reducing his or her tax liability.

Describing the document as “very welcome” and full of good advice, FCSA CEO Julia Kermode nonetheless took issue with HMRC’s warning that firms which offer a high percentage net take home pay, HMRC suggests 80% or higher, are probably non-compliant. While such firms exist and HMRC’s assertion about net take home pay is correct, Kermode explained that these entities should not be referred to as umbrella companies at all, precisely because they fail to adhere to the compliance standards that true umbrella companies always do. They are, she said, disguised remuneration schemes.

True umbrella companies, she continued, are employers of contractors and provide them will all 84 of the benefits and rights associated with permanent employee status, while simultaneously granting them all the benefits of working flexibly as a contracting professional. Umbrella employers also process 100% of a contractor’s gross pay via RTI payroll, so that all contractors engaged via true umbrellas will not be in danger of receiving a steep tax bill at a later date.

Kermode cautioned that while it was a welcome development to see HMRC giving guidance on umbrellas, the FCSA is concerned that the current document may deter people from working with them entirely. There were, she said, many fully-compliant umbrella employers providing an entirely legitimate and much-valued service with multiple benefits to contractors, agencies and end-clients.

She added: “We warned HMRC that we would see a proliferation of tax avoidance schemes as a direct result of the 2017 Off-Payroll reforms and our prediction has become a reality. Recruiters must ensure that their supply chain is not facilitating tax avoidance otherwise they risk a corporate criminal offence under the Criminal Finances Act, so choosing compliant umbrella employers for their PSLs has never been more important.”

Umbrella companies have been in the headlines recently after the Unite trade union claimed that construction giant Balfour Beatty would prohibit the use of umbrellas on a huge highways contract. Subsequently, however, it emerged that this was a misunderstanding after Balfour Beatty issued a statement clarifying that it was not targeting umbrella companies.

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