Thursday, 9 October 2014

Umbrella Companies in Construction

Use of Umbrella Companies 
in Construction
Written by DangerMouse

Unless you have been living under a rock for the last 6 months, you will know all too well about the new scourge in our industry, that is the use of umbrella companies by the majority of employment
agencies since April 6th this year.

This has come about due to the government making changes to the tax system in this years Finance Bill to try and eradicate the practise of 'false self employment' by agencies abusing the CIS system (that was designed only for genuinely self-employed people) and to try and bring workers back into direct employment, with the better terms and conditions and security that go with it.

It was, on the surface, what looked like a noble effort that would put an end to the 'hire and fire' mentality that the our greedy masters have enjoyed for years, not to mention the extra (estimated) half a billion pounds the Inland Revenue loses each year in unpaid employers National Insurance that the firms directors have been bankrolling their latest yachts with. It sounded like a win-win situation, so what went wrong?

Firstly it was rushed through in the final few months before the budget, and just as the government was warned at the time, there wasn't enough thought and planning put into it, and we are now paying the price of their incompetence and lack of foresight.

The most glaring omission was there was nothing in the new legislation to protect the workforce.
It was suspected at the time that agencies and employers would find loopholes, and they did, in the form of Umbrella Companies.

As the majority of workers are painfully aware, the firms and agencies have decided that they don't feel they should have to pay that pesky employers NI, despite making billions of pounds profit year on year, let alone holiday pay or proper terms and conditions in accordance with the JIB rules.

So how are they getting away with it? Well, unfortunately the whole sorry situation is apparently legal!

Yup, various ministers and HMRC have responded to complaint letters they have received from various disgruntled workers, myself included, with, for the most part an attitude that is at best dismissive, as if we are an annoyance that needs to just put up and shut up. After all, they've got their 11% pay rise, so why should they care? Its not as if they're supposed to represent the people that pay their wages or anything is it?

Lets look at some of the facts though. Umbrella is not new. It has been in operation since around 2000, when HMRC started to crack down on IT contractors abusing the tax system with IR35 legislation (more on that later). Since my other half works for an IT recruitment agency, I thought I should get some inside information. They offer two payment options for their contractors, Umbrella & Ltd company. This is so they operate a business to business model, so can recruit permanent staff who will be paid PAYE by their new employer, and can pay contractors via their own Ltd company, or Umbrella.

So they all want cards in, or set up their own Ltd companies then right? Well no, actually. The majority of their contractors want to stay that way, and many choose Umbrella! So why is this?
Firstly money. The average day rate my better half sees is about £500 a day, with the average
Salaried position being around £40-50k. If you worked 46 weeks (as most subbies do) on £500 a day you would earn £115,000 in a year! If you don't believe me, I have found one example courtesy of ContractorUK.

The average day rate they suggest you ask for as a Linux administrator is £400 per day.
I then looked for a similar PAYE role, and found one in London paying £35,319-41,553 per annum.

Working on a day rate of £400 for 46 weeks would net you a staggering £92,000, around 2.5 times more than if you were cards in!
The second reason is IR35. According to the HMRC website 'The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or Partnerships, in circumstances where an individual worker would otherwise -
  • For tax purposes, be regarded as an employee of the client; and
  • For NICs purposes, be regarded as employed in employed earners employment by the client.

Given that most IT contractors sit at a desk doing the same job as their cards in colleagues, they would fall within the scope of IR35 (all those saying 'just go Ltd', take note), so they use an Umbrella company to be fully tax compliant, as the penalties for falling foul of IR35 can be harsh.
As they are picking up a much bigger wage packet than if they were directly employed, and can book expenses to offset some or all of the extra burden employers NI, unsurprisingly they don't get any complaints regarding Umbrella companies!

The problem we face is that neither the firms nor the agencies want to increase our wages even a few quid to cover the shortfall in our net pay due to the extra tax burden, let alone pay us 2.5 x what we are on! If we were paid in the same manner as the IT lot we'd go from around £15 an hour cards in to £37.50 an hour Umbrella!

As Lisa Keeble, MD for ContractorUmbrella Ltd wrote in an article earlier in the year,

  • Umbrella companies are used very commonly in the IT industry; they provide an alternative to a Personal Service Company (one man Ltd company) for workers wanting to operate as contractors. Agencies within the industry understand the way an umbrella company operates and will therefore offer a rate to the worker which is well in excess of the rate that they would offer should the worker be taken on their books as an employee.

    An umbrella company is a relatively new concept within the construction industry and, unfortunately, what is marketed as an umbrella company may be nothing more than a tax avoidance scheme which could leave workers subject to significant tax penalties at a later date.

    A proper umbrella company will engage the worker under an over-arching contract of employment and will engage with the agency via a business to business contract. Invoices will be raised for the work done and when payment is received from the agency the umbrella company will meet its legal obligation to HMRC and make their Employer’s NI contributions. They will also deduct their margin which is around £25-£30 per week and make contributions to a pension scheme through the auto-enrolment scheme where applicable. The balance of funds is the worker’s salary which is then subject to PAYE taxes.  All of this information should be given to the worker by the umbrella company before an employment contract is signed.

    The umbrella company is then liable to pay maternity pay, paternity pay, adoption pay, sick pay etc etc and this should be made as a cost to the business, it should not be a deduction from the worker to only be paid back at a later date if circumstances arise. 
What we have at the moment is as situation where the greedy wretches are saying 'we want to keep our profit margins just the way they are, and if the little man on the ground has his wage packet squeezed even more so our share holders and directors can keep the lavish lifestyles they're accustomed to, then so be it'.

This is an absolute disgrace. Not only are we still without the proper terms and conditions that direct cards in employment would afford us, we're now expected to pay the NI bill of the multi-national corporations!

So where do we go from here? Our biggest problem, same as its always been, is the blokes.
It was heartening when 91% of us vetoed the BESNA2 that was the original wage offer, and I hope we have the same landslide NO when it comes to the latest final offer that is currently being balloted, entrant grade or not.

What concerns me is that every site I go on the majority of the lads are either ignorant, clueless, scared or just plain spineless, and its only a small majority that will actually try to do something about it. Plenty mope about moaning, but when push comes to shove, who will actually get active on demos or try and change minds on site? Not many.

I feel if we don't do something now it will be too late. The Rank and file is getting smaller, the 'old school' sparks are getting ever closer to retirement (no doubt much to their relief), and the majority of the young 'uns coming through are usually completely unaware of how, as workers, we hold the power, and will just accept whatever they are given, like some kind of modern Oliver Twist. In the future there will be an entire generation of sparks who have never even heard of a Union, let alone aware of what one with a strong membership can achieve.

To that end, I think we all have a responsibility to educate those that don't understand what a perilous situation we are in, and encourage them to fight for what we are worth!

We can win this, but not without support. The future doesn't look good, but we, and only we, can
change it for the better.

Failing that, I'm going to start looking at IT courses!


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