The History of Umbrella Companies

Clarity Umbrella takes a quick look over the history of Umbrella Companies and the Legislation that has changed the working practices for umbrella companies over the years…

1999 – IR35 Intermediaries Legislation

IR35 was introduced to stop workers benefitting from the tax advantages that come from drawing dividends from a Limited Company i.e. no National Insurance Contributions. Although the legislation was intended to target those contractors who looked like employees, HMRC never managed to enforce IR35 to the extent that they had originally wished for.

Original HMRC Guidance on IR35 (please note changes to IR35 have lead to this guidance being significantly updated).

2004 – The Conduct of Employment Agencies & Employment Business Regulations

The Conduct Regulations, or to give the legislation its full title, The Conduct of Employment Agencies and Employment Businesses Regulations 2003, were introduced by the Department of Business, Innovation and Skills (BIS) to provide workers and hirers with minimum standards they should expect from private sector recruitment agencies and employment businesses.

The Conduct Regulations

2007 – MSC Legislation

The MSC Legislation was introduced to prevent workers being paid in dividends by an intermediary. HMRC decided that many workers who used MSC’s should have been declared inside IR35 and therefore not eligible to draw dividends from a Ltd Co. The legislation stopped MSC’s trading overnight as it contained debt transfer, which could be applied by HMRC to recruiters.

HMRC Guidance on MSC Legislation

2011 – The Agency Worker Regulations

The AWR legislation was introduced to give agency workers the same rights and working conditions as permanent workers. If workers are not engaged under an over-arching contract (or Swedish Derogation Contract as it’s also known) they were required to be given the same salary as a comparable permanent worker after 12 weeks of working under contract (Match Pay Perm Contract).

BIS Guidance on AWR

2014 – Offshore Employment Intermediaries Legislation

The legislation was introduced to prevent UK workers who are obliged to pay their taxes in the UK from operating through an intermediary based in an offshore tax haven. The legislation was the start of the campaigns by the Government to target tax avoidance & evasion.

HMRC guidance on Offshore Intermediaries Legislation

2014 – Onshore Intermediaries Legislation

This was introduced to prevent ‘false self-employment’. Workers who were previously engaged as sole traders were now subject to full PAYE taxes if they were under SDC (Supervision, Direction & Control) by the client. The biggest impact from this was felt in the construction industry where workers who previously paid class 2 & class 4 NIC’s were then required to pay class 1 NIC’s. As the end clients decided not to take the contractors on they were required to pay both employee’s and employer’s NIC’s.

HMRC guidance on Onshore Intermediaries Legislation: Further guidance.

2015 – Agency Reporting Requirements

With the introduction of Real Time Information reporting to HMRC, came the requirement for agencies to send monthly reports to HMRC advising them of the contractors they engage with and the intermediaries they work with.

HMRC guidance on Agency Reporting Requirements: Further guidance.

2016 – Changes to ITEPA, which will affect T&S

These changes meant that workers engaged through an intermediary would be assumed to be under the Supervision, Direction and Control (SDC) of the end client unless they can prove otherwise. Only workers who operate a PSC and are outside IR35 would be exempt from the changes. This legislation meant contractors operating via an umbrella company would no longer be able to claim tax relief on T&S expenses at source with the umbrella, and if not deemed under SDC would have to seek to claim tax relief via self-assessment.

HMRC guidance on changes to ITEPA.

2017 – Apprenticeship Levy

The Apprenticeship Levy is a tax applied on all businesses with a payroll of over £3m. Even though many in the industry sought for an exemption from the changes as the payroll figure was falsely inflated by our employees for tax purposes, the Government proceeded giving no leeway to any business. This levy is used to fund apprentices within the UK.

Apprenticeship Levy

2017 – IR35 Public Sector

One of the biggest industry sector changes came into force in the Public Sector. The legislation sees the liability placed on the end client (Public Sector Body) to determine if an assignment is inside or outside IR35. We saw the introduction of the CEST test to assist the clients in determining the contractor’s status, however there has been much criticism as to how effective the tool is. An inside IR35 determination leaves the responsibility of deduction of employment taxes to the end client, unless the contractor is choosing to operate via an umbrella company.

IR35 Public Sector

2018 – GDPR

General Data Protection Regulations: The regulations restrict what personal data we keep, how long we keep it for and the reason we keep it. This affects every business in the UK and it must be adhered to in order to reduce the risk of hefty fines.

GDPR

2018 – IR35 Private Sector

Legislation due to be brought into force in April 2020 to enforce liabilities on the end client for determining the IR35 status. If caught inside IR35 then it will become the end client’s responsibility to deduct all taxes at source or for the contractor to operate via an umbrella company.

Consultation and responses on IR35 in Private Sector

2019 – Taylor Review – Repeal of SDM

The Taylor Review has criticised the working practices of the lower paid workers determining that the SDM model falls foul of the AWR rights for workers. Due to be enforced from April 2020, if agreed.

Review of Modern Working Practices

We will continue to add to the History of Umbrella Companies as Legislation changes.