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Advice on ‘umbrella’ and ‘limited’ companies and how to spot and prevent being caught up in tax avoidance schemes.

What are the NEU’s key policy concerns in this area?

These arrangements drain funding for education away from schools while paying supply staff much less than those directly employed by local authorities and schools. Several umbrella companies seek to minimise the amount of tax paid. Limited company arrangements couldalso  be a vehicle for tax avoidance.  The union is also concerned at the risk of individual supply staff being deprived of statutory rights or facing HMRC action due to tax or payroll errors.

What is the NEU stance on umbrella companies and limited companies?

The NEU believes that supply staff should be directly engaged by the school/academy or local authority as set out in our Alternatives to Agencies (A2A) toolkit. We have substantial reservations about umbrella or limited company arrangements, and advise members against entering into them wherever possible. HMRC states that “Compliant umbrella companies ensure that the correct tax and National Insurance Contributions are paid. However, HMRC is also aware of tax non-compliance within this sector, which will be contributing to the wider tax gap.”

What are the different employment categories for supply teachers?

An employee is someone employed on a “contract of service” or “contract of employment”. Supply teachers working via agencies are generally workers (see below) rather than employees. This may include supply staff working under umbrella company arrangements, who may be employees of the umbrella company.  However, employment contracts with umbrella companies generally confer only the minimum statutory employment rights.

A worker is someone engaged under a “contract for services”. This status is less secure and gives narrower access to employment rights. This can include supply teachers who obtain their teaching work via supply agencies on a day-to-day basis with no obligation to work and no guarantee of work. Such staff have access to certain rights under the Agency Workers Regulations 2010 (the AWR) from day one and additional rights after completing the qualifying period of 12 weeks in the same role with the same hirer. 

A PSC/limited company contractor  has limited access to employment rights. Supply staff are often told they can work in this way if they set up and work via limited company arrangements.  However, being engaged as a limited company contractor does not mean that the individual concerned is automatically out of scope of the protections provided by, for example, the AWR, which will depend on their individual situation.

What are “umbrella companies” and how do they work?

Some supply agencies will try to insist that supply staff are employed by umbrella companies, although NEU surveys have found that this practice has declined in recent years. Umbrella companies act as the legal employer for workers such as supply teachers who obtain work via employment businesses.  Umbrella arrangements usually involve four parties – the teacher, the school, the employment business and the umbrella company. The teacher’s 'employment' contract is with the umbrella company, not the employment business.

Typically, the employment business will agree an assignment and pay rate with a school and then look for a supply teacher to undertake the assignment. 

The rate agreed with the school would be inclusive of employers’ costs. After these deductions are made, the remaining amount would be the worker’s gross pay.

The employee contributions (income tax, employees’ National Insurance Contributions, workplace pension) and the umbrella margin are then deducted. 

The amount remaining is the worker’s net pay.

In other words the agency will agree a total assignment rate and within that a pay rate.  Employment benefits such as sickness and maternity benefits and workplace pension contributions will generally be at the statutory minimum only. Many umbrella companies also withhold an amount of money to be passed back to the supply teacher later in the form of holiday pay (see below). 

My umbrella company charges my employers’ as well as employees’ NI contributions.  Is this right?

No.  Some members raise the concern that they have paid the employer NICs from their wages as well as their own employee NICs. Usually this is not the case, with payslips reflecting that employer’s NIC has been deducted from the fee paid by the end client or employment business to the umbrella company, rather than the member’s gross wages.

It is unlawful for employers to withhold funds from their employees’ gross pay to cover employer NICs costs incurred on this pay.

If a member has reason to believe this is happening, they should contact the NEU AdviceLine in the first instance. If necessary, contact can be made with ACAS, the Advisory, Conciliation and Arbitration Service, who are available to provide free and impartial advice to employers, employees and their representatives on their rights and obligations under the relevant legislation.

What are “limited companies” and how do they work?

The person concerned pays a fee for the establishment of a limited company (often referred to as a personal service company – PSC) for which they become the sole owner, director and contractor (rather than worker or employee). They will generally pay a third party to handle company tax returns and year-end accounts on their behalf, as well as receiving and processing payments for work.

The problem with this type of arrangement in education is that it assumes the contractor will not be under the direction, supervision and control of the school/hirer.  However, where a teacher is required to teach classes, whose regular teacher is absent, the teacher concerned will almost certainly be acting under the direction, supervision and control of the school/hirer and thus in an employed capacity rather than a self-employed one. They will therefore not have access to tax relief on travel and subsistence expenses, even though they may be told this is the case. Be aware too that a claim by an agency that a limited company scheme is "HMRC approved" is very unlikely. HMRC does not  “approve” or accredit limited company schemes.

Do supply staff have to agree to work under an umbrella company or limited company arrangement?

No.  Some NEU members are told by their agencies that the agency will only offer work to supply staff covered by an umbrella company or limited company arrangement.

While lawful, the NEU strongly disapproves of this practice. But you do not have to agree to this and should ask to be paid by the agency on a PAYE basis.  Many supply teachers find that an agency will agree to PAYE rather than lose the teacher to another agency. Being paid directly by the agency on a PAYE basis does not give you employee status - and the agency may say you won’t receive the same pay rate - but it does avoid the need for one of the above arrangements.

The NEU obviously does not endorse any umbrella company arrangement. If you think that you want to or have to work under such an arrangement, however, you should check whether the particular umbrella company is a member of any trade body with some form of code of conduct. The best known of these is the The Freelancer & Contractor Services Association (FCSA) which has a Compliance Code for its members.

Are umbrella companies tax compliant?

The NEU has grave concerns about whether some umbrella companies are tax compliant.  A survey of NEU supply members in 2021 found that 72% of respondents had been promised by their umbrella company that they would be able to keep 80, 90, or 95% of their wages and be tax compliant. 

This is highly unlikely as the basic rate of income tax is 20% and NI contributions are also due on earnings. Also, 29% of respondents reported that their umbrella company had arranged payment so that only a fraction of their salary was paid through payroll and subject to PAYE. 

Finally, 19% of those surveyed said that payment from their umbrella company was routed through various companies before it came to them.

These practices are highly likely to constitute some form of tax avoidance. 

What is tax avoidance and what can I do if I suspect it?

Tax avoidance is bending the rules of the tax system to gain a tax advantage that was never intended.

It usually involves contrived transactions that serve no real purpose other than to artificially reduce the amount of tax that someone must pay.

Tax avoidance does not pay, as most schemes simply do not work.

People who use tax avoidance schemes end up paying both the tax they should have paid, interest and potentially a penalty. This is on top of the fees they paid to the person or business offering them the scheme. Everyone is legally responsible for their tax affairs and for paying the correct amount of tax even if they get someone else to do it for them.

HMRC launched a Tax avoidance: don’t get caught out national campaign to help agency workers, such as supply teachers, understand the risks of using tax avoidance schemes and how they could be sold to them.

If you are worried about being caught up in a tax avoidance scheme, the NEU advises that you go first to HMRC’s how to spot tax avoidance guide which includes personal stories of people who have been caught up in tax avoidance.  It’s worth understanding how umbrella companies work as some try to break the tax rules. HMRC’s guide to what it’s like to work through an umbrella company explains.  You can also use the payslip guidance to  understand more about what your payslip should look like (this actually gives examples of a supply teacher’s payslips) and use the interactive risk checker to check if your employment arrangements could involve tax avoidance.

Agency workers can report a tax avoidance scheme to HMRC if they are worried about becoming involved in tax avoidance or want help to get out of a scheme.

HMRC has recently published the names of 2 tax avoidance promoters on the GOV.UK website in order to help members of the public steer clear of the Disguised Remuneration Schemes they are promoting.  This is the first time HMRC has used new powers to name tax avoidance schemes and their promoters as part of a campaign to warn the public not to get caught up in tax avoidance.  HMRC has additionally published a video ‘Tanya’s Story’ to highlight the experience of a critical care nurse.  This is also included in the HMRC Tax Avoidance – Don’t Get Caught Out campaign.

Understanding how you’re being paid is the best way to make sure you do not get caught up in tax avoidance. 

Checking your payslips and contractual arrangements will help you confirm you are paying the right amount of Income Tax and National Insurance contributions, so you do not get an unexpected tax bill later.

Do umbrella or limited company arrangements allow tax relief on travel and subsistence expenses?

Supply staff engaged by umbrella companies cannot claim tax relief on home to work travel and subsistence expenses.

Since 2016, HMRC tax rules have specified that supply staff working via "intermediaries" (namely those engaged by umbrella companies or supply agencies) cannot claim tax relief where they are under the “supervision, direction and control” of the hirer (namely the school). This has brought the tax rules into line with those applying to employees generally, underlining that supply staff are employees rather than self-employed. 

The issue of supervision, direction and control is pivotal to the legal definition of someone who is an employee as opposed to someone who is genuinely self-employed. 

For example, an employer can direct where and when a supply teacher should work, what subjects and classes they should teach, which duties they should undertake and so on, and can supervise and control the quality of the teaching, punctuality, conduct and so on, of the teacher. Unlike a self-employed contractor, a supply teacher cannot send in a deputy on any day they are not available to be present.

The status of someone working as a supply teacher in a school is emphatically that of an employee, rather than self-employed.

Some agencies tell supply teachers that they can claim tax relief on such expenses when covered by a limited company arrangement. Since April 2017, under the off-payroll working rules (IR35), schools and local authorities have had a new duty to ensure that those working for them pay the correct tax rather than giving a tax advantage to those who choose to contract their work through personal service companies.

Only those who are genuinely self-employed, such as independent contractors running workshops or projects who do not work under the supervision and direction of the school/hirer, can realistically take advantage of the tax relief available in limited company arrangements. In most cases, self-employment is not legitimate for supply teachers. If you are incorrectly working as self-employed, you are at risk of HMRC taking action to recover the tax that should have been paid.

Do umbrella or limited company arrangements affect my rights under the Agency Worker Regulations and other legislation?

Supply staff are  sometimes told that the Agency Worker Regulations and workplace pension provisions do not apply to limited company arrangements. This, if true, clearly will not benefit the teacher.  HMRC guidance states that "Simply putting earnings through a limited company would not in itself put individuals beyond the possible scope of the [Agency Workers] Regulations. Individuals may choose to do this for the sake of flexibility or for tax reasons. However, where the relationship between the individual, TWA [Temporary Work Agency] and hirer remains, in essence, a tripartite relationship, and a hirer is not a client or customer of such individuals, they are likely to be in scope."

Do supply teachers earn more if they work under umbrella or limited company arrangements?

This will depend upon the pay rate for the work undertaken, the level of fees charged by the umbrella company or for support for the limited company, and other variables such as the amount which can be claimed as legitimate expenses etc. 

Remember that if employed by an umbrella company you will have to pay the umbrella company margin on top of your usual payroll deductions.

Supply staff working under a limited company will see deductions made for employer's NI and VAT.  Such individuals may find that once such deductions have been made, any pay advantage over engagement by the agency on a PAYE basis is negligible or non-existent.

How can I find out how much I would earn with an umbrella company?

From 6 April 2020, employment businesses are required to provide agency workers with a Key Information Document (KID) when they register with the employment business and before work-finding services can be provided.

The KID should set out a range of pay-related information, such as the minimum rate of pay the agency worker can expect, who should pay them, how often they are paid and if there are any agreed deductions.

Differences between the rate paid to the umbrella company by the employment business and the amount paid to the worker after all fees and deductions must be accounted for and explained. The employment business is not required to offer multiple methods of engagement (PAYE, umbrella, Limited Company), but where they do the employment business may choose to provide a KID or KIDs to illustrate how each method would affect their take home pay. When the individual has selected their method of engagement (if there is a choice) they must be provided with a KID that reflects how they will be paid

Compare the KID with the pay you would take home if paid directly by the agency on a PAYE basis. If the KID provides for ‘holiday pay’ to be deducted and paid later, make sure you know about the arrangements for payment (and ensure you receive it when it is due). Holiday pay (which should show up on both the KID and payslip) is deducted and held aside, to be paid either when the worker takes holiday or paid out if they don't take holiday before they leave. We know that a lot of holiday pay is lost by workers not knowing they need to specifically ask umbrella companies to pay it out.

Ask questions about the other matters discussed in this guidance.

The KID must be provided before work-finding services provided by the employment business can begin. Never sign any document exempting an agency or umbrella company from any liability. After signing a contract, always check your pay slips carefully to confirm that the correct deductions have been made. If anything on the pay slip is unclear or causes you concern, contact the umbrella company without delay. If you cannot resolve an issue regarding tax liability, contact HMRC directly. For employment-related problems, contact the NEU for advice.

Further advice

NEU supply members with concerns or problems relating to their employment conditions should in the first instance contact the NEU AdviceLine.

Further information and guidance for supply members can be found on the NEU website.

You can join the NEU on-line or on 0345 811 8111 (local rate) or you can complete an application form and return it to National Education Union, Hamilton House, Mabledon Place, London WC1H 9BD.

We want supply members to work together to take forward our work for supply teachers. Contact the NEU locally to find out about participating in your local branch/district and join with other members in your area to tackle common problems. Contact details are on your membership credential and on the NEU website.

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