IT contractors ‘forced against their will’ to work for umbrella companies, survey finds

IT contractors are being forced into providing their services through umbrella companies “against their will”, with many complaining about not understanding the contents of their pay slips, including whether or not they have been paid correctly.

That’s according to a survey of 611 contractors conducted earlier this month, 49% of whom worked in IT, while the rest self-identified as working in either engineering (10%), oil and gas (4%), healthcare (4%), finance (12%) or interim management (2%) roles.   

Since the onset of the IR35 reforms in both the public and private sectors in recent years, the number of contractors who are providing services to end-clients via umbrella companies has risen markedly.

The reforms resulted in contractors having to cede control for determining how they should be taxed to the end-clients that engage them, as part of a clampdown by HM Revenue & Customs (HMRC) against contractors misrepresenting their employment status to artificially minimise how much employment tax and National Insurance Contributions (NICs) they should pay.

This shift in responsibility created a sizeable additional administrative burden for end-clients, as HMRC’s guidance stated they must individually assess every contractor they work with to decide if the work they do and how it is performed means they should be taxed in the same way as permanent employees (inside IR35) or as off-payroll workers (outside IR35).

This, in turn, resulted in numerous anecdotal accounts emerging about contractors being blanket assessed as all being “inside IR35” or being told they could only continue working for their clients if they agreed to work through umbrella companies.  

And the survey – carried out by contracting authority ContractorCalculator – set out to uncover the impact this trend is having on the working conditions of contractors now working via umbrella companies.

According to its findings, the majority of the poll’s respondents said they felt forced against their will to work through an umbrella company, with 80% claiming they were told they had to work that way when hired on an “inside IR35” basis.

From this group, just over a quarter (27%) said they were given the freedom to select which umbrella company they wanted to work through, whereas 63% said they were told to choose a provider from a “restricted list” and 10% were told they only had one firm they could use.

The respondents also confessed to feeling confused over how they are remunerated for the work they do, as an umbrella employee, with just 40% confirming they know if their payslip is accurate or not.

On a related note, 24% said they had not been auto-enrolled onto a pension scheme by their umbrella company, while 14% claimed to have been unlawfully told they were not entitled to this.

“The survey found that most contractors are forced into umbrellas against their will, with restricted choices and promotions of dubious schemes,” said ContractorCalculator, in a supporting statement.

“Most are unaware of basic legal rights and compliance requirements regarding pay, pensions and regulations. There is also widespread confusion and lack of transparency around pay rates, payslips, holiday pay accruals and deductions, with less than half able to determine if they are being paid correctly.”

The conduct of the umbrella company industry has been under close scrutiny for a number of years now, amid reports of non-compliant companies acting as fronts for tax avoidance schemes and contractors complaining of having unlawful and unnecessary deductions made from their pay packets.

In light of these claims, the government has repeatedly faced calls to push through regulation to better protect contractors who have to provide their services through umbrella companies, but progress on this front has been very slow to date.

Dave Chaplin, CEO and founder of ContractorCalculator, set out why regulation and action on this matter is sorely needed.

“Our survey paints a picture of an industry rife with non-compliance and contractor exploitation. This is unacceptable, and urgent reform is needed. The onus is now on regulators and the government to crack down on umbrella malpractice,” he said.

“The government was warned about unregulated umbrellas before IR35 came into effect but failed to act. They’ve sat on data that could have prevented abuse yet done nothing. And they haven’t educated workers enough to protect themselves. The statistics speak for themselves.”

He added: “While complete legislative reform may not come by April 2024, enforcement activity should help curb abuse short term. Once reforms are enacted, the umbrella market will likely shrink as dodgy operators leave, leaving the quality providers to thrive. More contractors may end up on the agency payroll.”

Crawford Temple, CEO of independent umbrella company assessment organisation Professional Passport, said it was important the sector is regulated but that will “only work” if coupled with active enforcement action taken against non-compliant companies.

“These findings are concerning but they are not surprising, and it is now critical that policymakers listen to stakeholders and experts to find a way forward for everyone in the supply chain so that umbrella workers know they can rely on those umbrellas they are working with,” he said.

“Tax avoidance and disguised remuneration schemes have been allowed to thrive in recent years… and we have proposed a number of solutions to HMRC to help tackle non-compliant and criminal activity, such as tapping into the data that it already holds as well as working more closely with the accreditation bodies but for reasons best known to HMRC themselves, this has been ignored and only got a cursory mention in the latest consultation,” he said. 

“Without visible and effective enforcement, market distortions will continue and the long-referenced level playing field is now further away than ever.”