Guest Blog - Is it time to put down the umbrella?

Since the introduction of the joint and several liability provisions in Chapter 11 of Part 2 of ITEPA 2003, umbrella companies have faced additional scrutiny. While their underlying compliance obligations have not changed, the need to demonstrate compliance has become paramount.

Umbrella companies are no strangers to scrutiny; the industry has been calling for regulation for many years (though perhaps what we got is far removed from what was desired!).

Umbrella companies became a popular temporary contracting model for many agencies and end clients. This rise in popularity was due in large part to changes to the legislation governing self-employed status in 2014 and the off-payroll working rules introduced for the public sector in 2017 and the private sector in 2021. Those changes created additional obligations and liabilities for other parties in the supply chain. The umbrella was widely regarded as the safe choice, generally insulating those parties from PAYE liabilities arising from the umbrella's operation - until now.

Is there any future?

Over the years, many contracting models have come and gone. Composite companies seem like a distant memory and mini umbrella companies have fallen by the wayside - but are umbrella companies doomed to the same fate?

For the temporary contracting market to abandon umbrella companies entirely would be unworkable and unnecessary. They play a key role in the temporary labour supply chain, and it would be extremely difficult - though admittedly not impossible - to remove them from it entirely.

That said, many agencies and end-client businesses are looking at alternative models and reconsidering their stance on self-employed and limited company engagements - and that is no bad thing.

At Markel, we have always championed self-employed and limited company contracting for the right type of individual. While these options are not suitable for every engagement, neither is a PAYE umbrella. Self-employed and limited company contracting carry risks and compliance obligations, but so does the PAYE umbrella model.

So, while umbrella companies should not abandon ship, there may be significant benefits in diversifying the contracting models they offer. With the correct, compliance-based approach, this could provide individuals and clients with a more flexible and adaptable approach to temporary contracting.

Self-employment and limited companies are complicated

The key to operating any self-employed or limited company supply model correctly - as with anything involving tax - is compliance and record-keeping.

Robust contracts are important. They should address the relevant status factors, including personal service, control and mutuality of obligation. However, contracts are only one part of the assessment: the terms must be consistent throughout the contractual chain and accurately reflect the reality of the engagement and the working practices in place.

The fundamental status considerations for self-employment and IR35 overlap, but each regime has its own rules and responsibilities where other parties are involved in the supply chain.

For self-employed engagements involving an agency, it must be established whether the worker is subject to, or to a right of, supervision, direction or control. Under the off-payroll working rules, the end client may be responsible for determining the IR35 position, with other parties in the chain required to follow that determination. Both models require robust processes, evidence and a clear audit trail.

Any arrangements must also be reviewed carefully against the purported umbrella company provisions. Transparency across the supply chain is important, but it is not, by itself, a complete answer to whether those provisions apply.

Specialist advice is recommended to ensure businesses do not jump out of the frying pan and into the fire. However, with the appropriate time, investment and controls, the compliance requirements are not insurmountable.

Where do we go from here?

Over the coming months and years, we are likely to see some umbrella companies close because of compliance failures. That is true of businesses in any industry, however, and it is difficult to foresee a world in which compliant umbrella companies do not exist. They are embedded in the fabric of the contracting industry.

Will self-employed and limited company models replace PAYE umbrella employment? No. However, I firmly believe that businesses seeking to thrive and increase their market share need flexibility in how they approach contracting. If agencies or end clients are looking for self-employed or limited company models, they will find a provider that offers them. Once they establish a relationship with another provider, they may choose to move their umbrella business too, as many businesses prefer to place most of their requirements with one trusted supplier rather than several.

If you are considering diversifying your contracting operation, now is the time to explore it - but do it properly, with thorough and clearly documented compliance processes in place.

About Markel Tax

Markel Tax's Contractor Solutions team (formerly Accountax) has advised on umbrella company compliance, self-employed status and IR35 for more than 25 years. We were the first to win an IR35 case at tribunal level and have represented more IR35 and self-employed status cases at tribunal than any other tax consultancy.

Through our experience of defending taxpayers against enquiries, we developed our self-employed status and IR35 insurance products. These are underwritten in-house by Markel, an A-rated insurer, and offer additional peace of mind to our clients.

David Harmer

Director, Contractor Solutions - Markel Tax