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IT contractors hit by delays in Covid-19 furlough scheme payments from umbrella companies

A lack of clarity over how Covid-19-related furlough pay calculations should be totalled up for IT contractors working for umbrella companies has left many facing financial hardship, it is claimed

Caroline Donnelly
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Published: 28 May 2020 15:00

The government stands accused of adding to the financial hardship facing IT contractors who have lost work during the Covid-19 pandemic by failing to adequately clarify how the Coronavirus Job Retention Scheme (CJRS) works for those employed through umbrella companies.

Under the terms of the CJRS, employees are eligible to receive 80% of their usual monthly salary, up to £2,500, provided they are furloughed by their employers.

In situations where a contractor provides their services through an umbrella company, the two entities are considered to have an employee and employer relationship, leading to the assumption that contractors should be eligible to be furloughed and receive financial support through the CJRS.

However, Computer Weekly understands that some IT contractors have been told they cannot be furloughed at this time, even though there is no work available for them to do, because the umbrella companies they work for are unclear if and how they will be reimbursed through the CJRS.

Speaking to Computer Weekly, Julia Kermode, CEO of the Freelancer and Contractor Services Association (FCSA), said the situation is down to the government failing to provide clear guidance on how the CJRS applies to umbrella companies and the contractors they employ.

“The vast majority of umbrella employers want to pay their contractors at 80% of average pay, and they want to give them access to the government support through the job retention scheme. I can think of no umbrella employer that has arbitrarily decided not to support their contractors,” she said.

“On the contrary, they have been working 24 hours a day, seven days a week to get into a position whereby they can support their workforce.”

However, until the government clarifies how exactly umbrella companies are supposed to use the CJRS, many will continue to act cautiously and delay furloughing the contractors on their books, she said.

“While waiting in the hope of receiving additional guidance from the government, some umbrellas have felt that they had no option but to delay furloughing their employees because they cannot risk making the wrong financial decision,” she added, which could have “business-ending” consequences for these firms.

Clearing the confusion for IT contractors

Much of the confusion appears to stem from a lack of clarity over how much money umbrella companies should be claiming on behalf of their contractors, as it remains unclear if they should be entitled to 80% of their average taxable pay or the National Minimum Wage.

“Once submitted to HMRC, [CJRS claims it] cannot be corrected later, which has contributed to further exacerbating the delay. This means that an umbrella deciding to calculate furlough pay based on [National Minimum Wage or National Living Wage] cannot subsequently increase it to average pay if it has already been reclaimed from the government,” she said.

“So delaying furlough has actually been in the best interests of contractors, so that they can receive the highest pay possible, in the majority of circumstances, however that is little consolation for people that have no income in the meantime.”

The FCSA offers an accreditation scheme for umbrella firms that want to mark themselves out as operating to the “highest industry standards”, and – for that reason – the association has been actively lobbying the government in recent months to clear up the confusion over how furlough calculations for umbrella company employees should be made.

According to Kermode, this work has garnered some progress and resulted in “pieces of clarity” being issued by parts of the government, including HM Revenue & Customs (HMRC), but more needs to be done.

“We have lost count of the number of different versions of guidance that has been issued, and the various quotes from HMRC that have been circulated. It has been extremely unhelpful that there has been no centralised view forthcoming from HMRC,” she said.

“I do, of course, appreciate the huge challenges facing the government currently, but I simply cannot understand why they have put us in this position of uncertainty when it could have all been dealt with at the outset.

“It is unforgivable to ignore such a large part of the UK’s workforce, indeed the very same workforce that will play a crucial role in the economic recovery of the UK as we edge our way towards the so-called ‘new normal’,” she added.

In response, a spokesperson for HMRC told Computer Weekly that it and the Department for Business, Energy and Industrial Strategy (BEIS) have both furnished the umbrella company community and their “representative bodies” with detailed advice on how payments to contractors through the CJRS should be made.

“As you would expect, some employers have contacted HMRC directly for advice about how to operate the scheme, and of course we have been happy to provide this advice based on our published guidance,” the spokesperson said.

“We have provided the clarity required to make decisions on how to operate the scheme, and we note from public announcements that a number of umbrella companies, including a number of FCSA members, have decided to make CJRS claims and pay their workers at greater than the statutory minimum rates. Such claims are permissible so long as the relevant guidance has been followed.”

Calls for increased umbrella company regulation

However, based on feedback provided to Computer Weekly by the contractor community, there remains a number of other umbrella firms that are continuing to drag their feet on this issue.

One way of addressing this could be for the government to pick up the pace with rolling out regulation to govern how all umbrella companies should operate, which is something it has faced repeated calls to take action on in recent years.

The government-commissioned 2017 “gig economy” review by former Tony Blair adviser Matthew Taylor, for example, made a case for umbrella companies to be regulated more closely, and – ahead of the IR35 reforms coming into play within the private sector – there have been renewed calls for this to happen.

This is in response to some private sector organisations responding to the reforms by banning limited company contractors from their workforce, and declaring – instead – that only freelancers who provide their services through umbrella companies can continue to work for them.

At the same time, there are known instances of where some less reputable umbrella companies have acted as fronts for tax avoidance and loan-based remuneration schemes, which – in turn – have saddled thousands of IT contractors with life-changing tax bills in recent years too.

Dave Chaplin, CEO of tax consultancy ContractorCalculator, said the onset of the IR35 private sector reforms, which have now been deferred until April 2021 because of the Covid-19 outbreak, forced many contractors to join umbrella companies so they could carry on working and they are now financially suffering as a result.

“The poor treatment of umbrella workers, as well as agency staff, has been brought into sharp focus with the arrival of the Covid-19 crisis, as many umbrella workers have had their employment terminated and not been furloughed. The blame firmly lies with the government and the fact it has dragged its feet on regulation,” Chaplin told Computer Weekly.

“Everyone throughout the entire supply chain, including compliant umbrellas, is crying out for regulation and ridding the industry of the cowboys who give the whole sector a bad name. This message was loudly reiterated to Jesse Norman as part of the Off-Payroll review.

“I have a lot of sympathy for those umbrella firms that are operating compliantly, but government needs to step up its regulation enforcement plans as a matter of urgency and before the introduction of the Off-Payroll [IR35] legislation, otherwise it will have another scandal, akin to the loan charge, on its hands.”

Kermode shares a similar view, and claims plans were previously afoot to bring in regulation for umbrella companies from April 2020. “That would require primary legislation to be passed, which has not been possible due to other legislative pressures such as Brexit,” she said.

“We strongly believe the umbrella sector must be regulated ahead of off-payroll legislation being rolled out to the private sector so contractors are protected from the numerous tax avoidance schemes that mask themselves as ‘umbrella’.

“It is these unscrupulous schemes that need to be stamped out, which must be the first priority for any regulation of the sector,” Kermode added.

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