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Contractors beware - not all umbrella companies are the same!

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Continuing our series into the complex and often misunderstood world of umbrella companies, we once again turn our attention to the newbie contractor and in particular, how they can differentiate one umbrella company from the next.

We know the drill, you've just landed your first freelance contract and it's a beauty - a 12 month gig with a generous daily rate and the possibility of an extension. The agency is happy, the client is happy, you are happy, and the missus is absolutely over the moon!

Once the communal high fives are out the way, you suddenly realise that there's one small problem. The agency doesn't run in-house PAYE, or to put that another way, you need an umbrella company ….fast.

Now there are some in the industry that believe that the only difference from one umbrella company to the next is the price they charge and their standard of customer service. We posted an entire article about this theory last week which was then fiercely debated in our forum .

The conclusion? Well, yes it's pretty safe to say that the weekly fee and level of customer service are important when comparing umbrella companies but there is also one more key ingredient that should really be considered above all else. It's possibly the single most important thing that differentiates umbrella companies and one that the would be contractor and referring agency cannot afford to overlook……….COMPLIANCE.

What is compliance?

Being compliant is a business in itself. The large umbrella companies will spend literally thousands each year reviewing their internal processes to ensure they are robust enough to withstand an HMRC compliance visit.

It has been argued that the smaller umbrellas companies may struggle to meet the costs associated with 'being compliant'. Whether they do or not is open for debate. One things for sure is that HMRC want (and frankly need) a compliant marketplace, and in achieving this they seem pretty determined to weed out the bad eggs (or non-compliant) companies in the umbrella industry.

So what is compliance? In our view it's doing everything right in the eyes of HMRC, Companies House, the Health & Safety Executive, ACAS and so on. Umbrella companies need to act as a real employer to contractors by meeting ALL of their employment obligations. They're not just a vehicle for saving tax and to be honest; if an umbrella isn't acting as a true employer it's questionable whether the expenses you claim are in fact allowable for tax purposes.

How do I know which umbrella companies are compliant?

Now that's a great question and we're glad you've asked. It's simple really because we've already done the hard work for you. Over the last 6 months, we've given umbrella companies the opportunity to send us confirmation that they are compliant.

Measuring compliance is an almost impossible exercise so we've been quite matter of fact about it. If an umbrella company has been subject to a third party compliance audit which they've successfully passed within the last 12 months then that's good enough for us.

Check out our league tables paying particular attention to the compliance column. Those companies that have sent through confirmation of a successful audit have had their compliance status changed to 'confirmed'.

Now we need to stress that this is not an exact science as HMRC have not issued a blueprint of the 'compliant' umbrella. What you do have though is probably the next best thing - a list of companies that have invested significant amounts of time and money making sure that they (and ultimately YOU) will not fall foul of HMRC should you choose to sign up.

Bringing it all together

So then, congratulations on the new job. I'm sure this will be the start of a long and fruitful contracting career. You now have all the information required to go out there and sign up with an umbrella company.

To conclude, here's what you need to look for in order of importance.

1.    Compliance - I think we've said enough about this already
2.    Customer Service - this includes having adequate insurance
3.    Weekly Fee - be sure to compare the gross admin fee NOT net admin fee

It's now over to you….again.

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