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In the light of a recent scandal involving a high-profile umbrella company, industry leaders are again raising the question of why the industry is not regulated along the lines of banks, mortgage providers and other financial institutions. 

Here, we look at why regulation would reassure both clients and contractors and provide a better all-round service.   

The advantages of umbrellas 

The advantages to using an umbrella company are well known. 

They offer contractors a simple and cost-effective means of receiving a salary with minimum admin, and the same rights and benefits as being traditionally employed, with a continual employment record, and some additional extras. 

And, contractors are led to believe that they are protected because the umbrella they’ve chosen is compliant with both UK tax laws and all HMRC regulations. 

However, in some cases this is clearly not so. We examined the latest scandal to hit the world of umbrella companies here and were pleased to discover that the firm in question is no longer registered on the Financial Conduct Authority’s website as an Appointed Representative. 

Yet, before its alleged misconduct, it was listed in the FCA’s register, despite five years of suspicious activity which led to its contractors being out of pocket and HMRC being denied its lawful payments.

How can contractors lose out?

Wherever there are large sums of money, there are people trying to take it from its rightful owners. This happens in every walk of life, and is not exclusive to umbrella companies. 

However, within the world of umbrella companies there are some specific scams which contractors can fall foul of. 

These include, but are not limited to:

• Holiday pay fraud – the umbrella company fails to remind the contractor of their full holiday entitlement and, when it’s not used, keeps the holiday pay that they are entitled to
• Expenses fraud – the umbrella company pays part of the contractor’s salary as ‘expenses’ which are not subject to NI and Income Tax, leaving the contractor open to being pursued by HMRC at a later date
• Skimming – the umbrella company includes a small, hidden payment to them from the contractor within their payslip. This often goes unnoticed because of its small size or complicated labelling. Meanwhile, the umbrella company pockets these payments which often amount to many thousands of pounds over the course of a year

The general advice for contractors is to be vigilant and not to assume that umbrellas offering enticing high rates of take-home pay are legitimate, because that’s not always the case.

The positives of regulation

There are increasing calls from respected and compliant members of the umbrella company industry for all umbrella companies to be regulated. 

In fact, last year the government launched a consultation into how the market operates, the results of which are currently being analysed.  

Currently there is no specific regulatory framework covering umbrella companies. This means that unscrupulous companies can make a higher profit than those who abide by the rules, treat their contractors fairly, and pay HMRC what it is owed.

Compliant umbrella companies insist that regulation would have many advantages such as:

• Greater transparency – currently Key Information Documents may not always make clear who the contractor’s employer is, leading to confusion on both parts. Misunderstandings can also take place around deductions from the contractor’s wages, as referenced above
• Better worker protection – regulation would ensure that contractors would only be offered umbrellas from compliant companies, meaning that they’d benefit from fair treatment and honest transactions 
• Clear guidance – if umbrellas were regulated, clear guidance could be offered to both contractors and end clients, ensuring that complex employment issues could be more easily understood
• Increased protection for compliant companies – a regulatory framework, backed by legislation, would enable compliant companies to shine out among the more dubious ones, attract more business, and develop the services and features which they offer to contractors, free of the worry of being tarnished by the bad reputation of others

What the umbrella industry needs

Leaving the governance of umbrella companies to bodies such as the FCSA and Professional Passport, who both try to encourage compliance and can ‘approve’ umbrella companies as far as their resources allow, would seem to be a dereliction of duty on behalf of the government. 

What the industry needs is legislation to ensure that all umbrella companies are fully compliant. Here at Payme, we’re proud not only to be accredited by the FCSA, but also to be a Professional Passport approved provider, and would wholeheartedly welcome legislation to ensure that all providers are as scrupulous and diligent as we are. 

Get in touch

If you’re worried that your umbrella provider doesn’t have FCSA or Professional Passport accreditation and you’d like to talk to a company that strives to achieve the highest standards of compliance, contact us in the strictest of confidence here, call us on 0333 200 0845, or email us at [email protected]