An umbrella company is a popular choice in the UK for those looking to employ agency contractors on temporary or fixed-term contracts.

Also known as “PAYE umbrella,” the umbrella company acts as an intermediary between the contractor and the recruitment agency or the end client. Umbrella companies handle payroll through PAYE — hence the alternative name — deducting relevant national insurance contributions (the UK’s form of social security), taxes, and pensions before paying the contractor.

Sounds simple, right? However, although an umbrella company may seem like a good option if your company wants to hire independent contractors or temporary workers in the UK, there are some pitfalls to be aware of.

How is it different from a PEO?

Before engaging an umbrella company, it’s important to consider all your international employment options.

On the surface, a global PEO (Professional Employer Organisation) and umbrella company are both third-party providers that help businesses with their international expansion goals by hiring overseas workers on their behalf.

However, although umbrella companies are also a type of Employer of Record (EOR), they act as an EOR for independent contractors rather than permanent employees. They take care of payments and sort out taxes, but umbrella companies can’t onboard workers on their payroll or make an individual your employee. Essentially, they are just a way of legitimizing paying people who would otherwise be consultants.

Another key difference between a global PEO and an umbrella company is that the latter doesn’t offer an HR service or make arrangements to ensure a worker’s welfare is taken care of. This means that umbrella companies don’t provide the same competitive benefits or help get workers absorbed into the company culture in the same way a Professional Employer Organisation would.

Of course, some businesses might want an employment relationship that strips out some of the service and cost. However, using a global PEO is a far less risky way of hiring someone. A PEO provider allows you to legally employ workers in literally any country while offering a complete global HR cycle and taking any compliance issues off your plate. Plus, as well as paying all statutory contributions, a Professional Employer Organisation can help you provide additional benefits to retain top talent and make them feel like part of the team.

Understanding IR35

If you’re considering using an umbrella company, it’s also important to be aware of the IR35 legislation and choose a provider that’s compliant with tax obligations. (Non-compliance could land you in seriously hot water with HM Revenue & Customers, or “HMRC,” in the UK.)

IR35 (also known as the ‘off-payroll working rules’) was introduced to crack down on what the UK Government calls “disguised income” by contractors who are hired via intermediaries but perform the same duties as full-time employees. There were concerns that contractors would use intermediary companies to receive payments from their clients to avoid tax. Hence, the government introduced IR35 as a way of determining employment status and contractor qualification.

In the past, it was the intermediary’s responsibility to decide a worker’s employment status for each contract. For small businesses (one that doesn’t have a turnover of more than £6.5 million, a balance sheet total of more than £3.26 million and doesn’t have more than 50 employees) in the private sector, this remains the same. However, as of 6 April 2021, if you’re a medium or large business, the responsibility of determining the status of any contractors you engage with now falls on YOU — not the umbrella company.

Unfortunately, the locations where duties are performed have no bearing on IR35 either. So, even if you’re using UK workers on US soil, the legislation still applies. The off-payroll working rules apply to any contractor that is a UK resident and trading via a UK-based limited company — no matter where in the world they’re working from.

So, if a contractor is working for you in the US — which has a ‘Reciprocal Agreement’ (RA) with the UK regarding tax and social security — IR35 legislation will apply. As workers are liable to make social security contributions to the state they’re working in, contractors working in the US will also have to make US social security contributions.

Not sure what the right hiring option is for your international expansion? Contact TopSource Worldwide today to find out more about our international employment services.

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Published On: 26/05/21Last Updated: 14/09/22

About the Author: Sam Barnes

Sam is our Global Business Development Manager for Employer of Record services. For the last 10 years, he has assisted companies in the successful execution of their international expansion plans. Sam tells us “There’s something inherently exciting about growing a business into overseas jurisdictions. Each country does things slightly differently and it’s great to be able to share learnings on statutory requirements and cultural nuances”. Email: sam.barnes@topsourceworldwide.com

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