Effectively the contractor becomes an employee of the umbrella company and is assigned to work for construction clients. The umbrella company takes on the administrative burden of payrolls, taxation, timesheets, insurance, invoicing and so on. Where they are used, the recruitment agencies source the appropriate skills required by the construction client.
The use of umbrella companies can:
- Give clients greater flexibility in the contractors that it uses.
- Reduce the potential liabilities and responsibilities of recruitment agencies.
- Reduce the administrative burden for contractors.
- Offer potential benefits in the expenses that contractors can claim (such as travel and accommodation), although these expenses are still subject to HMRC rules.
Umbrella companies can be seen as a means for helping contractors comply with intermediaries legislation (IR35), introduced in 2000, which restricts the ability of contractors to claim that they are self-employed (and so reduce their PAYE liabilities) when they are effectively employees. See intermediaries legislation for more information.
The use of umbrella companies has increased following the introduction of legislation in April 2014 that treats payroll companies as employers, requiring that they subject workers to tax and employee National Insurance Contributions (NICs) deductions at source and introducing a new liability to pay employer NICs. This change was introduced as the government believed that ‘employment intermediaries’, or ‘payroll companies’ were being used to enable workers to falsely claim that they were self-employed sub-contractors when in fact they were permanent, full-time employees. This allowed them to reduce their employment taxes and obligations. See payroll companies for more information.
The move to use umbrella companies has been criticised as employees effectively pay both employee and employer NICs, may not be paid during holidays and may be paid largely through expenses, the eligibility of which is subject to scrutiny by HMRC.
In the 2015 Budget, Chancellor George Osborne announced '...we will stop employment intermediaries exploiting the tax system to reduce their own costs by clamping down on the agencies and umbrella companies who abuse tax reliefs on travel and subsistence – while we protect those genuinely self-employed.' Ref Chancellor George Osborne's Budget 2015 speech 18 March 2015.
In September 2016, it was reported that the Union of Construction, Allied Trades and Technicians (UCATT) was encouraging members to down tools to protest about umbrella companies, saying " “Workers are sick and tired of paying umbrella companies and this campaign will show them that by undertaking a bit of collective action they can do something about it.”
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