Why Umbrella Companies are Here to Stay

Up until April 2016, there was a widely held belief that umbrella companies existed to allow the deduction of legitimate expenses in order to increase contractors’ net income.

We would argue that this was never really true, since less than half of our contractor employees ever claimed expenses, but in any case, it was a long time ago. Nineteen months after legislation severely restricted the value of claiming expenses, umbrella employment companies are still here and still thriving.

If umbrella companies offered nothing but payroll with tax relief they would not have survived those reforms, and yet more contractors than ever are now enjoying the benefits of umbrella employment. In fact, many contractors have returned to umbrella after the public-sector reform of IR35 and changes to the flat rate VAT scheme made it less attractive to trade through a PSC.

If umbrella employment isn’t about tax relief, what is it about?

Whether one refers to Umbrella Companies, Professional Employment Organisations or something else, if employment is being outsourced to a specialist, we’re talking about the same thing.

Here’s how it works:

Employment is outsourced by the recruiter to a specialist contractor employment company.
Outsourcing employment saves the recruiter time and money, and allows them to hand over the risk and responsibility of employing contractors to someone with the expertise and infrastructure to do it properly. This frees up resources that the recruiter can allocate to their core business. Assuming they take appropriate care when choosing their suppliers, for example by insisting all suppliers are FCSA Accredited Members, they also benefit from a fully compliant supply chain.

Workers have continuous employment across all their contracts, which grants them a whole host of benefits. They’ll receive statutory payments, like sick pay and maternity/paternity pay and they’ll have access to a workplace pension and holiday pay. Continuous employment makes references easier to obtain and credit more accessible, and there may even be other employee benefits like childcare vouchers and our own Orange Genie Rewards. They get all the benefits of employment and the flexibility of contracting in one, convenient package.   

Rumours of our death have been greatly exaggerated

Confusion about what the above model should be called has led some to speculate that umbrella companies have had their day. In the wake of the travel and subsistence reforms of April 2016, those umbrellas who promoted themselves on the basis of tax relief have been forced to change. Some may have struggled, some may have folded, and some are calling themselves by another name, but nineteen months later, umbrella employment companies are still an important part of the recruitment industry.

Speaking to Accounting Web for their article on the subject, FCSA’s Julia Kermode said “Since April this year we’ve seen a massive increase in demand for umbrellas.” She went on to say, “Hirers, rather than going through the complexities of putting contractors on their own payroll or on agency PAYE, are often looking for umbrellas that will actually employ the contractor and therefore a solution in terms of IR35 because it doesn’t need to be considered.”

Recent FCSA research has found that contractors using umbrella employment are earning higher rates and securing longer contracts than they were two years ago.

“From my point of view, I’m seeing the sector professionalised, rather than becoming redundant,” Julia, CEO of FCSA, said.

Julia’s words very much match our experience. At Orange Genie Umbrella we always saw our role as offering outsourced employment, with legitimate expenses claims as one of many benefits to our employees and partners. Without the issue of tax relief to muddy the waters, we see an industry that better understands, and values, what we do.

We’re in a stronger position than we were nineteen months ago, before the expenses reforms of April 2016. Compliant umbrella employment has always been in demand, but recent changes in legislation have made it more attractive than ever to contractors, and recruiters are keen to partner with compliance experts following the update to the Criminal Finance Act.

It’s true that the recruitment industry has endured its share of change and upheaval, which is possibly why we’ve seen “the end of umbrella companies” being predicted so many times over the years. In addition to everything else Orange Genie offer, we are now experts at managing legislative change, which makes us even more valuable to the recruiters we work with.

Whatever you choose to call us, umbrella companies are here to stay.

If you have questions about this or any issue, or if Orange Genie can help in any way please contact our expert team on 01296 468483 or email recruiters@orangegenie.com.

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