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Ian Kennedy (MD Blue Recruitment – Education Recruitment Business)

“I have worked with Originem for several years now and they have never failed to keep me and my business ahead of any legislation changes. We have already been using Originem’s Umbrella Reflective Model for several months now which guarantees that my business cannot fall foul of any employment tribunal relating to contractors having unlawful deductions from their agreed pay rates. This model still allows my contractors to benefit from full employment status and all statutory rights as if going through a standard Umbrella, and all at no extra cost to me or my workers”.

In response to the public sector IR35 reforms, many contractors have felt they are unjustly funding the tax obligations of their recruiters and clients, including employer’s national insurance (NI) contributions.

Even before the April 2017 legislative changes, recruiters have increasingly been encouraging contractors to work through umbrella companies. Many of these recruiters are deceptively advertising contracts to contractors at the rate that they pay the umbrella company.

While the contractor rightly expects to receive the quoted rate, the employment costs, including employer’s NI, must first be funded from the sum paid to the umbrella, leaving the contractor far short of their expected income. This could be construed as a legal misrepresentation, rendering the consequent deduction of the client’s or recruiter’s employment costs unlawful.

“The Umbrella margin, Employer’s NI are overheads that need to be factored into the overall assignment rate – in addition to the advertised pay rate,” comments Julia Kermode, chief executive of the Freelancer and Contractor Services Association (FCSA). “FCSA’s position on this has always been very clear; people should not be charged for receiving their wages, nor should they be paying employer’s NI.”

When a recruiter engages a contractor via an umbrella, it is required to uplift (increase) the Pay As You Earn (PAYE) rate, accounting for all the employers tax obligations and costs:

  • Holiday pay at 12.07%
  • Employer’s NI at 13.8%
  • Apprenticeship levy at 0.5% (where applicable)
  • Contributions into a pension scheme
  • Umbrella company margin.

The remaining sum, not including the uplift, would then be treated as the contractor’s earnings and subject to income tax and employee’s NI. Unfortunately, in addition to quoting contractors the umbrella’s invoice value, many recruiters are also pocketing a portion of the umbrella fee. This is known as a ‘kick back’, which many non-compliant umbrella companies with lower operating costs accept to avoid being frozen out by recruiters.

How can recruiters stay compliant with the law?

ContractorCalculator CEO Dave Chaplin says:

“After much contention, it is now crystal clear where this liability lies. Recruiters and clients need to stop the practice of advertising rates that include their own tax obligations, otherwise they could find themselves incurring significant losses at Tribunal.”

“We are already starting to see contractors heading to Tribunals via the Advisory, Conciliation and Arbitration Service (ACAS) after finding that employer taxes are being deducted unlawfully from their agreed rates,” explains Chaplin.

Call Originem: 0161 713 1730