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Majority of workers using umbrella companies see no benefits

Research from trade body for independent professionals finds that most self-employed workers operating through an umbrella company think there are no advantages to the arrangement

Nearly two-thirds of self-employed workers operating through an umbrella company see no advantage to doing so, according to research.

The use of umbrella companies, which act as an intermediary between contractors and clients in the supply chain for payroll purposes, has grown significantly since IR35 reforms were introduced for the private sector in April 2021.

According to a consultation launched by HM Revenue & Customs (HMRC) in December 2021, the number of contractors working through umbrella companies has markedly risen from around 100,000 during the 2007-2008 tax year to five times that number now. This means just over a third of all self-employed workers operate through an umbrella company.

While the annex of the Lords consultation report acknowledged the “umbrella company model” became popular following the introduction of the IR35 tax avoidance rules at the turn of the millennium, the cause of the more recent rise in the number of contractors is not so explicitly stated.

Research by the Association of Independent Professionals and the Self-Employed (IPSE), however, found that nearly seven in 10 (69%) umbrella company workers have stated that their clients insisted they work through an umbrella company since the IR35 changes to off-payroll working last year.

This is because the reforms ushered in changes that made medium-to-large private sector companies responsible for determining whether the limited company contractors they engaged should be taxed in the same way as salaried workers (inside IR35) or off-payroll employees (outside IR35).

Realising the reforms would markedly increase their administrative burden and compliance costs, many firms in scope of the reworked IR35 rules tweaked their hiring policies to minimise the disruption the changes would cause to their businesses.

Hiring bans

In some cases, this even meant enforcing hiring bans that prohibited the use of limited company contractors and instead favoured the use of freelance workers who provided their services through umbrella companies.

A further 63% of respondents to IPSE stated that although they had some level of choice, they were only given a limited range of umbrella companies to choose from, while 5% said they were completely unable to choose their umbrella company and had to operate through one allocated to them.

Despite the recent uptick in use of umbrella companies, IPSEs research also found that seven in 10 (74%) freelancers are “dissatisfied” with working via an umbrella company, with half being “very dissatisfied”.

On why they were dissatisfied, 80% cited the fact that they have to cover the liability for Employer’s National Insurance, and where applicable, the Apprenticeship Levy, through a reduction in their day rate.

A further 70% also believe they have lost their independence and ability to work however they wish since joining an umbrella company.

“The fundamental problem here is that people are being forced into pseudo-employment relationships they do not want,” said Andy Chamberlain, director of policy at IPSE. “Since the IR35 changes came in a year ago, thousands who proudly consider themselves self-employed are being pushed into umbrella companies under disadvantageous conditions, often without even a choice over which umbrella company they use.

“Today’s report was shared with the government following their recent call for evidence, and we hope they listen to us and the many umbrella company workers that have failed to see the benefits of working via an umbrella company,” he said. “In particular, we hope they put forward recommendations that stop freelancers from being forced into working for umbrella companies that limit their independence and give them no real benefits.”

Read more about IT contractors and umbrella companies

In February 2022, in the wake of its latest inquiry into the IR35 reforms, the House of Lords Economic Affairs Finance Bill Sub-Committee urged the government to pick up the pace of its commitment to rolling out statutory regulation for umbrella companies.

The sub-committee’s inquiry confirmed that the introduction of policies such as hiring bans in response to the IR35 reforms have resulted in more contractors being employed through umbrella setups, which, it added, was concerning because of the prevalence of “rogue umbrella companies” in the market.

“The sub-committee is very concerned that the off-payroll rules are encouraging the insertion of unnecessary intermediaries in the supply chain, adding to costs and opportunities for ‘rogue’ operators,” it said. “We believe that effective action requires a stronger focus on worker protection.”

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