As we explored in earlier blog posts, April’s introduction of IR35 in the private sector creates both opportunities and risks for accountants.
Contractor accounting firms run the risk of losing clients caught within the scope of IR35 and by companies providing them with work taking a hard-line approach and insisting all workers collaborate by coming onto their payroll as employees.
IR35 changes are likely to increase the use of umbrella companies. These can be used as a vehicle for contractors to engage through. They are outside the scope of IR35, with the umbrella company acting as the employer with individuals being taxed through payroll.
Accountants who work with contractors will need to either incorporate their own umbrella company or partner with third-party bureaus.
Creating your own umbrella company can be lucrative but requires efficient processes and in-house expertise. Alternatively, firms who refer to third parties need to ensure that those they are signposting to are legitimate according to the recent press coverage of bogus firms.
Risks and rewards of incorporating your own umbrella company
Umbrella companies are regulated by employment law, meaning that firms offering their own services will need to keep up to date with constantly changing legislation, which can also impact operations.
For example, over the last year, the introduction of furlough has meant that umbrella companies have had money paid back by the government but may have been operating at a loss due to the need to accrue holiday pay too.
Additionally, running an umbrella company requires the completion of many admin-related tasks that are not always relevant for contractors. For example, auto-enrolment procedures are unlikely to be required by employees but still need to be completed for each individual.
That said, running umbrella companies can also be a lucrative revenue stream for firms. Customer acquisition costs can be low by accountants building relationships with a large end client or agency.
It's worthwhile investing in these relationships as they can generate large volumes of individual clients for a relatively small investment.
This also overcomes the issue of umbrella companies often being a low margin business, with key referrers boosting client numbers.
The profitability of umbrella clients can be increased further by efficient management of related tasks. Using tools such as the Modulr Payments Dashboard for paying contractor salaries and HMRC payments introduces automation into umbrella company processes. It can result in one member of staff managing the workflow of hundreds of clients.
Key criteria to look out for when partnering with umbrella companies
Due to the focus of firms and their complexity, running an umbrella company won’t work for all accountants.
Instead, partnering with a specialist third-party umbrella provider may be necessary to retain broader client services from contractors who are inside the scope of IR35.
While there are plenty of options on the market for accountants to signpost to, firms need to ensure that umbrella providers are fit for purpose. Unfortunately, it would appear, according to Contractor Weekly, a handful of unscrupulous providers based overseas try and win business off the back of racy tax avoidance schemes and by offering higher take-home pay rates from not paying full payroll taxes.
Accountants should be mindful of referring to these bogus providers as this could result in reputational firm damage, alongside the risk of losing contractor clients.
Firms can counter this risk by partnering with umbrella providers accredited by the FCSA, a leading UK professional membership body dedicated to raising standards in the temporary labour market. The membership body helps minimise risk by performing process and financial audits on all their members. A complete directory of bureaus is accessible on their website.
Additionally, accountants should seek to partner with umbrella partners who provide a similar level of their service to their own. For example, large corporate outfits are likely to treat clients as numbers so are unlikely to be suitable for firms who differentiate themselves on customer service.
Case study: Tom Edwards, Operations Director at Churchill Knight & Associates
Churchill Knight & Associates was first established in 1998 and specialises in servicing the accounting needs of contractors and freelancers.
In 2016, Operations Director Tom Edwards expanded the firm’s services to incorporate an umbrella company to process the payroll of contractor clients. As a result, the firm now provides umbrella services for hundreds of contractors.
When setting up the umbrella, he split the workload into three different categories: sales, operations, and compliance. This made it easier to understand how the firm could win clients (Tom already had relationships with several bureaus), customise contracts to cover relevant employment law and manage the day to day processing of payroll.
Churchill Knight recently incorporated the Modulr Payments Dashboard to make payments which has helped to streamline workflows.Edwards says: “Modulr’s APIs plug into some really good Umbrella software meaning that is very efficient to process pay for workers and also adds an element of control which makes it harder for payments to be manipulated.”
His top tip for firms considering introducing their own umbrella is to employ an individual with relevant previous experience to join full-time or on as a consultant.
Contractor firms need to adopt a strategy on umbrella services to reduce the chance of losing clients. While incorporating umbrellas can increase revenues, it also requires significant firm resources, so accountants may first choose to partner with an outsourced provider before running their own.