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12 November 2019

Since the off-payroll legislation reform hit in 2017, we’ve seen the popularity of the umbrella company increasing. With that came the emergence of a wave of tax-avoidance schemes that target contractors offering a higher take-home pay. Although some of these schemes may call themselves umbrella, they are certainly not.  

What is an umbrella company, and how does it work? 

The primary function of an umbrella company is to organise payments for fix-term work undertaken by independent contractors. An umbrella firm enables the contractor to retain the flexibility of freelance work and consolidate the income into a single pay package with the knowledge that all responsibilities regarding their income are being taken care of.

When signing up with an umbrella company, you become one of its employees with it acting as an intermediary between you and your agency, or directly with your end client if no agency is involved. As an employee, you will receive a full overarching employment contract and have full employment rights like any other worker. 

What should you look out for?

The market is unfortunately littered with non-compliant solutions, and although recent government regulations have tried to clamp down on them, they still exist. 

Some may offer you a big take-home pay with reduced tax liabilities by paying a part of your income over through PAYE (as a salary) and the rest as an offshore loan, shares or annuities. 

Their offer will have its obvious short-term positives but will leave you at risk of hefty backdated tax penalties from HMRC. Anyone joining will be personally liable for a backdated tax bill topped with interest and penalties. 

HMRC lists known tax-avoidance schemes and publishes them here.

Key tell-tale signs of a disguised remuneration scheme:

  • 80 to 95% income retention rate promised
  • Only a fraction of your salary is paid through PAYE
  • You are offered to be paid through a loan or an investment payment (annuity, shares)
  • Your pay comes from a company other than the umbrella firm

The key is to approach their enticing marketing literature with a healthy dose of scepticism. Remember, if it sounds too good to be true, it generally is.

So how do you spot a compliant umbrella provider?

Look out for one with a good track record, and one that carries accreditation from a trade body like FCSA (The Freelancer & Contractor Services Association). 

All FCSA Accredited Members are tested annually against the FCSA Codes of Compliance by independent, carefully selected assessors. The assessors are top-tier regulated accountants and solicitors bound by their professional standards and code of conduct and are independent of the FCSA. 

No FCSA Accredited Member is allowed to operate Offshore Schemes, Loan Schemes, Trusts, Managed Services Companies Schemes, Pay-day-by-Pay models, or similar. 

A genuine compliant umbrella company will:

  • Pay over 100% of your pay through PAYE
  • Employ you 
  • Allow you to work with multiple end-clients and consolidate you pay
  • Give you full employment rights

Why work with SmartWork?

SmartWork is an accredited FCSA member, undergoing a yearly audit to demonstrate full compliance with the trade body’s strict code of conduct.

At SmartWork, the full umbrella package is provided with a host of additional benefits:

  • We process statutory sick pay, maternity/paternity and holiday pay and can assist you with mortgages advice and references. 
  • We also cover you for all of your work-based insurances, including Professional Indemnity and Employers/Public Liability. 
  • We pride ourselves on our personalised service with a dedicated account manager allocated to each contractor. 
  • Contractors have access to our SmartWork portal, allowing them to upload timesheets, submit expenses and e-sign documents easily. 

As always if you’d like to get in touch with SmartWork, please feel free to call us on 0800 434 6446 or send us an e-mail at info@smartwork.com. For more news and blogs, remember to follow us on LinkedIn and Twitter.

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