IR35: How can a payroll umbrella company help me?

I am a contractor and I have been told my role is within IR35. What options do I have?

If you are a contractor and your role is deemed to be inside IR35, then working via a payroll umbrella company is the logical choice. This is particularly true for those contracting via an agency. In some cases, if you are contracting directly with an end-client (i.e. not via an agency), the client may require you to go on to their payroll. For most inside-IR35 assignments, however, you would be required to use a payroll umbrella company; and Competex Pro is the ideal choice!

How you work (i.e. via a payroll umbrella company or on the client payroll) will usually be decided by the end-client or agency.

Why is there so much fuss about IR35? What is it anyway?

IR35, also known as the Intermediaries Legislation, was introduced in 2000 and was designed to collect additional tax and NI from independent professionals that HMRC believed to be working in ‘disguised employment’. Disguised employment is where the working practices and wording of a contract are similar to that of an employee, but where the worker enjoys the tax benefits of working through an intermediary, such as a limited company, also known as a personal service company (PSC). Until recently, PSC working was the standard way of working for contractors, consultants, and interim managers in the public sector or working for large private sector organisations.

However, in 2017, new rules and regulations were brought into force by HMRC to prevent contractors from using PSCs. The new-look ‘Off-Payroll Working’ (IR35) rules are more stringent than the original IR35 legislation and as a result, many more contractors are expected to be ‘inside’ or ‘caught by’ IR35.

There are several employment tests that determine whether an assignment is inside or outside IR35. These are detailed in our free, downloadable comprehensive guide, IR35 Explained.

Who is responsible for determining the IR35 status of my role?

The new rules state that the end-client has the responsibility for determining the IR35 status of the contract, rather than the worker.

If your end-client is a small organisation, or is based overseas and has no presence in the UK, they are exempt from applying the rules. Instead, the responsibility for making the correct determination remains with you. Should you be unsure, the Competex Pro team is able to refer you to an employment law specialist who will be able to advise you.

If I disagree with the status determination, what can I do?

1. Use the HMRC Check Employment Status for Tax (CEST) tool to give an indication of your likely status. Be aware the tool has some known flaws and can only give an indication rather than a definitive status.
2. Have a discussion with your end-client about your role – it might help to give them a copy of the above results and/or write down the reasons why your role is not inside IR35 (if you believe it is not). Be aware that some end-clients may not be fully aware of the rules and may need help understanding them. Should this be the case, Competex Pro would be able to refer you to an employment law specialist who can help.
3. Request a status determination statement (SDS) from your end-client. The client must have taken reasonable care in making their assessment and must provide reasons for the determination. Blanket assessments are not acceptable – theoretically you could sue them if they do not make the decision on an individual basis.
4. If you still disagree with the status determination, you can appeal against the result, providing your own evidence in the form of a contract and working practices check from a specialist. Be aware there is a cost attached to this, and it could jeopardise your relationship with the end-client.

It is determined that my role is inside IR35. What do I need to do now?

If your role is found to be inside IR35, you are required to be on a payroll and taxed in the same way as regular employees on a payroll would be, even if the assignment with the end-client is only short-term. You must either:

• Go on to the payroll of your end-client
• Work via a payroll umbrella company such as Competex Pro

Using a PSC is no longer viable under the new rules and is not recommended.

In some cases, you may end up working on the client’s payroll. This depends on the nature of your assignment, and is at the discretion of your end-client. However, if your end-client does not wish to employ you, they will require you to use a payroll umbrella company.

If there is an agency in the chain, the end-client may insist that the agency either employs you or that you work through a payroll umbrella company.

Many recruitment agencies do not run PAYE for contractors and therefore would ask you to find a suitable payroll umbrella company.

I have been told to find an umbrella company by my end-client or agency. What is a payroll umbrella company?

A payroll umbrella company is a company that employs freelance workers such as contractors, interim managers and consultants, who may work on numerous different assignments, at various locations, either through agencies or directly for end-clients.

The payroll umbrella company, which enters into an employment contract with the worker and a service contract with the agency or end-client, provides an employment solution whereby the worker is paid through a payroll that is compliant with HMRC rules and UK law.

How can a payroll umbrella company help me in my situation?

In most cases, if you are using a payroll umbrella company it is because your agency or end-client requires you to. However in some cases, a worker may also choose the umbrella route themselves because of the administrative simplicity that umbrella working offers. Once the assignment has been secured, the contracts signed and your PAYE scheme set up, you simply need to submit timesheets and expense claim forms (if applicable), and wait to get paid!

When you are employed by a payroll umbrella company, you are entitled to all statutory employment rights, such as holiday pay, maximum working hours, sick pay and Maternity/Paternity/Adoption pay. These are listed in our free, downloadable Guide to Working through a Payroll Umbrella Company.

Working through a payroll umbrella company on a series of assignments gives you continuity of employment, which can help you if you are obtaining credit or a mortgage.

Working through a payroll umbrella company allows you to retain a certain degree of independence, as the payroll umbrella company has no involvement in your work-finding activities or the work you carry out for your end-client.

Is there any impact on my assignment if I work through a payroll umbrella company?

Working through a payroll umbrella company creates minimal impact on how you carry out your assignment, for you, your agency and your end-client.

In your case, you still find and arrange your own assignments, discuss the scope of the job and the proposed day rate as well if they are prepared to reimburse any expenses relating to the assignment. You still carry out the assignment directly with your client. However, the service agreement for your assignment is negotiated and signed by your payroll umbrella company, instead of by you.

In the case of your end-client, the alternative would be to run payroll for you, so you using a payroll umbrella company takes away that responsibility, minimising the impact for them.

In the case of your agency, the alternative could also be to run payroll for you (if the end-client decides they do not want to), so you using a payroll umbrella company takes away that responsibility, minimising the impact for them.

One change that does need to be taken into account is the proposed day rate for the assignment. When working through a payroll umbrella company, your day rate will need to change to take into account the different costs and margins involved. Be aware that the costs of employing you (e.g. Employer’s NI, holiday pay, workplace pension contributions) are now passed to the payroll umbrella company, and your day rate (the amount paid by your end-client or agency to the payroll umbrella company) will need to be uplifted to include these costs, and to include the margin charged by the umbrella company.

Once these costs have been deducted by the umbrella company, the amount you are paid (your ‘pay rate’) should be no different to the rate you would be paid had you been on the end-client’s payroll.

If you need help with a day rate calculation based on the above, the experts at Competex Pro can assist you with that.

About Competex Pro

Competex Pro is the only payroll umbrella company in the UK that specialises in working with interim managers, consultants and senior independent professionals. Our expertise draws on our 20 years of payroll experience in the contractor market. We aim to bring clarity and transparency to the process of working via a payroll umbrella company, and our employees’ peace of mind is key to us.

If you wish to join us, we would be delighted to welcome you. If you have any questions about getting started, contact us today on 01737 234560.