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IR35 and the Autumn Budget: what are the government’s plans for umbrella companies?

3-minute read

IR35 and the Autumn Budget: what are the government’s plans for umbrella companies?
Sam Bromley

Sam Bromley

29 October 2021

Details on plans to regulate umbrella companies failed to materialise during the Autumn Budget.

And while the Autumn Budget featured a number of headline announcements, there was little for contractors and freelancers struggling since the introduction of IR35 reform.

Tim Stovold, head of tax at Moore Kingston Smith, told The Express: “The cat is out of the bag now with many businesses now complying with this regime so it would be very disruptive to reverse its implementation now.”

Is there a problem with umbrella companies?

Umbrella companies are companies that contractors and freelancers can join as an alternative to setting up (and working through) their own limited company.

The umbrella company acts as an intermediary between the end client and the worker, handling their payroll. Workers get paid through PAYE, with costs like taxes, National Insurance contributions and workplace pension payments deducted.

As workers are employees of the umbrella company and paid through PAYE, IR35 status isn’t a consideration.

The Association of Independent Professionals and the Self-Employed (IPSE) suggests that more workers are now contracting through umbrella companies after IR35 reform in the private sector, when it became the end client’s responsibility to work out a contractor’s off-payroll status.

Are contractors satisfied with umbrella companies?

IPSE’s latest research suggests that more than a third (34 per cent) of contractors are working through umbrella companies.

But umbrella companies aren’t currently regulated. The same IPSE survey suggests that nearly a quarter (23 per cent) of contractors working through an umbrella company aren’t satisfied with them. In addition:

  • more than half (55 per cent) of contractors aren’t happy that they can’t claim business expenses from their umbrella company
  • a third (33 per cent) of contractors aren’t happy with the cost of employer’s National Insurance (which many umbrella companies pass onto contractors through deductions to their day rate)

In the Autumn Budget and Spending Review, the government also reiterated its plans to increase National Insurance and dividend tax by 1.25 percentage points from April 2022.

Were there any IR35 Budget changes to umbrella companies?

Campaigners were calling on the Chancellor, Rishi Sunak, to announce how the government plans to regulate umbrella companies during the Autumn Budget.

The government has already created a "workers’ watchdog" that brings three existing agencies under one roof. One part of its remit is ‘protecting agency workers’, which campaigners believe is the first step towards umbrella regulation.

But there was no further detail in the Autumn Budget and Spending Review, with no funding specifically allocated.

The rationale for regulation is that umbrella companies may still be operating tax avoidance and disguised remuneration schemes, where pay is hidden as bonuses or loans. This makes it important to research and choose a reputable umbrella company.

Lucy Smith, managing director of Clarity Umbrella, told ContractorUK: “We had hoped to see an allocation of some budget for the SEB – the Single Enforcement Body – which would then in turn lead to some kind of official legislation for the industry.

“The industry is ridden with cowboys and schemes, and with much criticism being thrown at umbrellas, it’s just another stab in the back for those who are operating compliantly.”

What do you think about umbrella companies?

At the end of our last IR35 update, we polled contractors to get a quick health check of their finances following IR35 changes.

Of those surveyed, 84 per cent said that they’re making less money.

Now, we’d also like to understand what you think about umbrella companies. Have you used them in the past, or are you using one now? Let us know in the comments below – and be sure to answer our quick poll.

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