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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
We will continue to add to the History of Umbrella Companies as Legislation changes.
2021 – IR35 Reform in the Private Sector
Originally due to be introduced in April 2020, COVID 19 delayed the start of the legislation. However after receiving Royal Assent, the IR35 Private Sector reform is to be introduced in April 2021 which may see more recruiters and end clients issuing Umbrella Rate contracts to reduce the financial risks of incorrect determinations.