If you are taking into consideration employing workers in the UK, have contractors in the UK or even if your company is located in the UK, the IR35 should not be news to you. However, if you are new to the party, the IR35 is a piece of legislation that was reformed on the 7th April, allowing Her Majesty's Revenue and Customs (HMRC), the tax authority of the UK government, to collect additional payment where a contractor is an employee in all but name. It is designed to find out who is a genuine contractor rather than a disguised employee.
Now, not even a month into the enactment of the IR35 reform, compliance problems for both companies and freelancers are arising.
The Loan Charge All-Party Parliamentary Group (APPG) has published an inquiry into How Contracting Should Work, exposing compliance issues in supply chain also urging to rethink the IR35 reform.
One of the main topics that are discussed in this inquiry was the mushrooming of umbrella companies that often tend to exploit contractors and leave them with life-changing tax bills in the following years.
Too fast? Let’s have a look at what umbrella companies actually are, what they have to do with the IR35 and how an EOR might be the compliant alternative you were looking for when hiring freelancers and contractors.
What are Umbrella companies?
An umbrella company is a company that employs agency contractors who work on temporary contract assignments, usually through a recruitment agency in the United Kingdom.
Today, many contractors choose to work through their own limited companies due to the tax advantages of this approach and higher control over the his/her own finances. The downside however is that you will also have to deal with additional responsibilities to HMRC and Companies House.
When you join an umbrella company, you effectively become an employee of that corporation also receiving a salary. An Umbrella company also handles the financial affairs you would otherwise do by yourself, reducing the amount of paperwork and financial management.
This however comes with its downside since as a contractor or freelancer you will be missing out on tax planning opportunities. Also, an Umbrella company comes with a cost of around £30 a week (£1,500 annually) plus other additional costs. Services levied by umbrella companies can reach as much as 9% of the value of a contract, and many insist on contractors agreeing to a minimum level of charging or billable time; meaning the price can fluctuate.
The Rise of non-compliant Umbrellas
Because of the IR35 reform, freelancers and contractors are being forced into working through an Umbrella company. Many companies within the private sector are choosing to hire contractors through Pay-As-You-Earn (PAYE) umbrella companies, avoiding the responsibility of determining how the hired contractors are to be taxed and therefore penalisation.
This has led to the proliferation of dubious umbrella companies that do not only take far larger cuts than contractors were originally expecting but also offer schemes with unrealistic tax savings and “too good to be true” take-home pay rates that might lead to contractors facing life-changing tax bills in the following years.
A take-home pay of for instance 85% is difficult to achieve if not with a form of creative accounting to minimize the amount of tax the contractor has to pay.
Often this is done by splitting the contractor’s income into two different payments: a small one that is taxable and the larger amount as something non-taxable (e.g. annuity or benefit trust).
If you as a freelancer agree to a scheme like this, you could put yourself at an important personal financial risk, ending up with a large fine for unpaid taxes.
WorkMotion as a better solution than an Umbrella Company
If you put it simply, a global EOR service and Umbrella companies are both third party providers that support businesses expand and provide them with global talent by hiring and payrolling international workforce on their behalf.
But that is pretty much where the similarities end.
If we specifically look into how the engaging of contractors and freelancers work within WorkMotion, there are some important differences. As already mentioned, we work on a long term basis and therefore look into converting freelancers to employees to ensure full compliance and retention of talent. By doing this, companies will not only not have to worry about issues that arise out of the IR35 but also will help them to reduce costs, give them better control over the working time of their hired freelancers, have less turnover within the company, increase commitment as well as improve the sense of belonging.
Even though an Umbrella company provides the above mentioned support to both independent contractors as well as employers on a short-term basis, an EOR as WorkMotion, acts on a full-time basis, with employee engagement not focused on multiple clients but a single employer.
Further, we count with an extensive network of in-country experts with local knowledge that ensure comprehensive and compliant delivery. For instance, we make hiring employees from all over the world easy, which can be done through our platform with a following onboarding which happens in only three days. In contrast to an umbrella company, you can be sure that the payments as well as the benefit packages will be secure and on-time, always ensuring full compliance with each country's regulations.
If you are interested in how an EOR can support you in your HR operations and access the best talent all around the globe while remaining compliant, contact us!