The government website page, Working through an umbrella company, was designed to give workers a better understanding of how operating through an umbrella company works in practice. This guidance was updated on February 9 for the first time since November 2022, with four new paragraphs on ‘how you get paid’ and five on ‘checking your payslip’. In summary the updates cover further detail on the payment process for workers, what deductions will be made from their gross pay and how the worker can check the tax, National Insurance and pension calculations.
While described as “the best official guidance yet” by ContractorUK, in my opinion, there’s much more that the government could and should do to educate workers about working through umbrella companies in this day and age.
The Bigger Issue
The continued need for guidance on working through umbrella companies is indicative of a larger issue – the prevalence of tax avoidance schemes masquerading as compliant umbrella companies. These schemes lure in unsuspecting workers who are then hit with devastating tax bills when pursued by HMRC.
Despite promises to regulate the industry, the government has failed to deliver, largely due to the shelving of the Single Enforcement Body. Regulating umbrella companies would not only help put a stop to these dodgy schemes but also restore the sector’s reputation. Furthermore, it would reduce reliance on government guidance, which falls far short of addressing the complexities of umbrella working.
Seb Maley, CEO of IR35 specialist consultancy firm Qdos, bemoans the new umbrella company guidance, stating that while educating workers on how to spot potential tax avoidance schemes is “key”, it fails to “solve the bigger issue”.
Fred Dures, founder of umbrella payroll auditing provider PayePass, offers a more enthusiastic take on the guidance, saying that the update was “not a wasted exercise by any stretch of the imagination”.
The topic of payslips alone is complex and the improved guidance fails to directly address the issue of ‘skimming’ – the practice of deducting small amounts of money from each payslip over a long period of time – and holiday pay withholding. The guidance may help individuals spot the obvious cases which at least goes some way to clamping down on these unethical practices but it’s not enough.
In recent months, allegations of skimming have been levelled against several well-known umbrella companies. Although the legality of the practice is debatable in some cases, its unethical nature is undeniable.
So what’s the next step?
While HMRC’s umbrella guidance may be improved over time, it is merely a temporary solution that fails to address the underlying issues. The Spring Budget 2023 on March 15th offers a chance for the chancellor and prime minister to demonstrate their commitment to tackling this issue and supporting the crucial umbrella sector.
Meanwhile, compliant umbrella companies, of which there are many, must continue to self-regulate and prove to workers, agencies, and end-clients that they are good option.
If you have any questions please do contact Marie Pegram on 01462 687333 or by email firstname.lastname@example.org.