Safely Sheltered? Working Through An Umbrella Company

Sarah Bradford takes a look at the tax implications of providing workers through an umbrella company.

Many workers provide their services through an umbrella company. Where a worker works through an umbrella company, the tax implications depend on the nature of the relationship between the worker and the end client and, more specifically, whether the worker is subject to the right of supervision, direction or control.

An umbrella company is an employment intermediary – essentially, someone who makes arrangements for a worker to work for a third person. The umbrella company may supply the worker to the end client, or even to another intermediary. The worker does the work for the end client, but rather than the end client paying the worker, the end client pays the umbrella company, who pays the worker. The worker may or may not be an employee of the employment intermediary (the umbrella company in this instance).

An employment intermediary, such as an umbrella company, needs to assess whether the agency rules are in point and, if so, operate PAYE and National Insurance contributions (NIC) on payments that they make to the worker. If the agency rules do not apply, the umbrella company does not need to operate PAYE in respect of them, although it will be necessary to consider the impact of IR35 and the managed service company rules and decide whether these are in point. They will also need to tell HMRC about any payments made to workers to which PAYE is not applied.

However, before worrying about IR35, the agency rules need to be considered.

The agency rules essentially treat the agency as the employer where certain conditions are met. The rules are not limited to businesses that call themselves an agency – rather, they apply where all the following conditions are met, regardless of whether the business calls itself an agency or not.

The conditions are that:

However, there is a `get out of jail free’ card in that the agency rules do not apply if there is no one who has the right to supervise, direct or control how the worker does his or her work.

Similarly, the agency rules do not apply where the worker always works from home or from premises which are not controlled or managed by the client, unless the nature of the service provided means that the worker has to be at those premises. Nor do the agency rules apply if the worker provides his or her services as an actor, singer, musician or other entertainer, or as a fashion, photographic or artist’s model.

Where someone else is the contractual employer, the employment intermediary does not have to operate the agency rules – the requirement to operate PAYE falls on the contractual employer. 

The supervision, direction or control test is a crucial test, even if the above conditions are met. Where it can be shown that the manner in which the worker provides the services is not subject to, or to the right of, supervision, direction or control by any person, the agency rules do not apply and the umbrella company does not need to operate PAYE. 

In considering whether this test is met, it should be noted that the test considers whether anyone – the end client, the umbrella company, an independent project manager, a consultant or some other person – has the right to supervise, direct or control the worker. The supervision, direction or control does not need to be by the end client. Further, it is not necessary that this supervision, direction or control is actually exercised; what is important is that the right to supervise, direct or control exists.

Where the worker is engaged through an agency or umbrella company, HMRC presume a right of supervision, direction or control – and with this a presumption that the umbrella company is within the agency rules and therefore required to operate PAYE. Where this is not the case, the onus is on the umbrella company to demonstrate that the agency rules do not apply and to be able to provide satisfactory supporting evidence to back this up, if asked to do so by HMRC. Failure to do this may result in HMRC recovering PAYE and NIC from the umbrella company.

But what does this actually mean in practice, and how do HMRC determine whether the test is met? 

In considering whether the worker is subject to the right of supervision, direction or control, HMRC will look at the arrangement as a whole, and consider both the terms of the engagement and how the work is actually performed in practice. 

HMRC define supervision, direction and control as follows:

`Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do so and it is being done correctly and to the required standard. Supervision can also involve helping the person where appropriate in order to develop their skills and knowledge.’

`Direction is someone making a person do his/her work in a certain way by providing them with instructions, guidance or advice as to how the work will be done. Someone providing direction will often co-ordinate how the work is being done, as it is being undertaken.’

`Control is someone dictating what work a person does and how they go about doing that work. Control also includes someone having the power to move the person from one job to another.’

Jason is a web designer. He obtains work through an umbrella company, which places him with a delicatessen who want him to design a website for them. Jason meets the director and shows him some examples of his work. The director likes what he sees and gives Jason a free reign to design the website in accordance with the brief. Jason does the work mainly at home.

There is no supervision, direction or control. Consequently, the agency roles do not apply.

Neil provides IT support and finds work through an umbrella company. The umbrella company finds him a two-month placement offering IT support to a large architectural practice. For the duration of the contract, Neil reports to an in-house manager, who assigns him tasks and supervises his work. 

The agency rules apply as Neil is subject to direction, supervision and control. 

Where the agency rules apply, the umbrella company must deduct PAYE and employee’s NIC from the payments they make from the worker and pay this, together with employer’s NIC, which they must pay as the secondary contractor over to HMRC.

Where there is no right of supervision, direction or control, the agency rules do not apply and the umbrella company does not need to operate PAYE and NIC. Instead, payments can be made to the worker gross. 

However, where PAYE is not applied, the umbrella company must comply with the employment intermediaries’ reporting requirements and provide details to HMRC at least every three months of workers placed with clients where PAYE is not operated.

The agency rules take precedence over IR35 and the managed service company rules. Where the agency rules apply, there is no need to consider IR35. However, where there is no right of supervision, direction or control, IR35 will come into play if, but for the intermediary (umbrella company), the worker would be an employee of the end client, applying the usual employment status tests. 

If the agency rules are not in point and the intention is for the worker to remain outside IR35, the nature of the engagement must be such that the worker would be self-employed if working directly for the client. The terms of engagement and actual working arrangement must support this.

When working through an umbrella company, if the intention is to remain outside both PAYE and IR35, the working arrangements should be such that the worker is not subject to, or to the right of, supervision, direction or control and, ignoring the umbrella company, the worker would be self-employed if working directly for the end client.