Why Umbrella Companies are the Savior of the IR35 Reform!

Stay with me guys were almost finished! This is the final instalment on my “Reader’s Digest Encyclopedia of IR35”. So far, we have covered the what, why, who and how of the IR35 Private Sector Reform. The newly postponement has given the country some breathing space but now is the best time to prepare and avoid disruption to your business.

Well, if you haven’t guessed I’m going to explain how Umbrella Company’s (such as Cool Company) can remove most, if not all, of the risk from the supply chain. For the uninitiated an Umbrella Company is an employment service provider, we act as the intermediary between the worker (contractor) and the agency or end-client. Many benefits exist in this structure for both parties of which I will delve into within this article. But in short, the Umbrella Company will employ the worker and then lease them to the agency, who then sells the services to the end-client (simples).

To keep this easy reading, I will breakdown the benefits of working via an Umbrella Company into 3 sections. The end-client, the agency and the contractor.

End-clients

Let’s start with the end-client, once the reform is in place the end-client holds the majority of the risk when engaging PSC contractors. While my advice is to correctly assess the workers and put them into either PSC contacting approved or PAYE only. Direct PAYE causes its own issues, if your business utilises a large number of contractors then the insurance liability, management of contracts, payments and employers costs can be too much for some companies to handle and can cause business inefficiencies and losses.
Here is where the Umbrella Company solves these problems, firstly the umbrella solution is outside of the scope of the IR35 Private Sector Reform, meaning no risk at all from this model.

Additionally, the Umbrella Company is very efficient and managing multiple contracts and invoices even consolidating them if the client require it. Consolidated invoices for multiple contractors streamline your payment processes. And working under a master framework saves the monotony of signing multiple copies of contracts.

The Umbrella Company will also be responsible for insuring the worker, and management of the contractor’s employment rights under UK law. The removal of risk and provisions of a smooth process is why umbrella companies are an excellent choice to help manage the IR35 Reform.

Recruitment Agencies 

For years the recruitment industry has used Umbrella Companies, mainly to help remove the need for additional departments or headcount, alleviate the insurance risk and to help manage multiple contractors under one agreement and invoicing process.

So, if they already use umbrellas why change with the reform?

Well, as mentioned previously the reform can put a fee-payer liability on the agency if the PSC contractor is deemed to be a disguised employee. Using an Umbrella Company removes this risk, as the PAYE structure is outside of the scope of IR35. The reasons seem short, but this is because the partnerships between these industries have existed long before the reform was even an idea.

The Contractor

Many advantages exist for the contractors who engage an Umbrella Company. However, I will focus on the main one’s businesses may be unaware of. For the workers who operate through an Umbrella Company, they benefit the most from being protected by the UK employment rights act 1998. The rights cover sick pay, holiday pay, maternity and paternity pay, pensions working conditions, health and safety, fair treatment and in 2010 the Agency Worker Regulations added protection for comparable pay between temporary workers (contractors) and permanent employees.

All of the above are managed by the Umbrella Company with additional tasks such as tax, national insurance and pension management on each payment made to the contractor. The flexibility of the umbrella model is ideal for contractors as they do not need to deregister when an assignment finishes, they can stay employed by the Umbrella Company until they secure another assignment regardless of the time between assignments. This provides the agility needed by a lot of contractors who work irregular patterns, but wish to have a continuous employment history.