Umbrella Company?

Has anyone experience of setting up and running an umbrella company?

One of my clients has asked me if I would consider it. She is currently trading as a limited company but from 1st April has been told will have to be paid under PAYE or an Umbrella company (IR35). I know there are lots already out there so my gut feeling is to stay clear, but, my ambitious side of me is saying, look into it at the very least.

I guess in theory under IR35 there will be potentially more people requiring an umbrella company, but as a part time accountant starting out, is it a little too ambitious?



  • reader
    reader MAAT, AAT Licensed Accountant Posts: 1,037

    You will need to contact an employment lawyer in order to draft an employment contract between you and the contractor. Depending on how your contract is worded you may be liable to pay the contractor national minimum wage/living wage even if you are not paid by the agency. Consequently you need to be good at credit control and be prepared to go to the small claims court and pursue the agency where necessary.

    You will also be liable for statutory payments such as sick pay, holiday pay, statutory maternity/paternity pay etc. As these are statutory payments you have a legal obligation to pay these even if the contractor is not working and is not getting paid. This is why it is extremely important to study the agency workers regulations (AWR) and human resources (HR) in order to ensure you are not treating your employees illegally. As an umbrella company, the contractors are legally your employees and responsibility. Consequently you will need to retain your employment lawyer in case any of your contractors/employees wish to sue you.

    You will also need a commercial lawyer to study the terms and conditions of the contract the agency send to you, e.g payment terms, and payment procedure. E.g. how/when the contractor submits time to you, how/when you invoice the agency, how/when the contractor's time gets approved by the client, when the agency gets paid, when you get paid by the agency, how/when you process RTI and then finally make the net payment to the contractor.

    You will also need to contact the agency in order to get on their preferred supplier list (PSL) otherwise the agency is unlikely to work with you. The agency will need to run various credit checks on you/your company in order to ensure that your compliant, solvent, do not have a poor credit history, etc. The agency, for obvious reasons, will not want to pay an umbrella company that is a risk to the supply chain, i.e. client > agency > umbrella > contractor. If you cause the supply chain to breakdown the agency risks losing a client and candidate to another recruitment agency. The agency are likely to request dummy payslips showing how you breakdown the cost of your margin, e'er NI, gross wages, etc and your employment contract. For obvious reasons, the contractor will need to pay things like e'er NI, e'er portion of pension contribution if automatically enrolled, etc.

    You will also need to contact an insurance company in order to provide your umbrella company with insurance. The agency will need a copy of the insurance certificates in order to ensure that the level and type of cover is high enough. You will normally need at least £1m of cover for professional indemnity and public liability, and £10m of cover for employer's liability.

    It is hard but doable if you have a profitable accountancy firm that you can use to fund the investment into the umbrella company.
  • burg
    burg Moderator, FMAAT, AAT Licensed Accountant Posts: 1,441
    We have also considered this recently. In the first instance we stand to lose 10 clients due the the new PSB IR35 rules. I can swallow that and it's fine we can recover that income fairly quickly. The bigger risk is we have around 50 - 60 other contractors. If HMRC decide that they should role out these new rules to everyone who is contracting then that will be difficult for us to stomach.

    @reader raises some really good points. Our concerns are SSP as there is no longer funding available. This could easily wipe out profits. The second major concern is the risk of non-payment from the agency. Whilst you may have terms that are designed to not pay the 'employee' until the agency have paid you if the agency miss their date of payment you still need to pay your staff. Legal obligations for paying staff far outweigh a business to business debt. We considered factoring but when you compare the fees to the charges you would incur huge losses are quickly the resulting factor.

    Overall we have not dismissed the idea but it is by no means a simple solution.

  • Beckster
    Beckster Registered Posts: 12
    Firstly, apologies for late response (decided last minute to have the day off with my children) and huge thanks for your very welcome comments.

    I certainly think that there is potential for setting up an umbrella company however I don't think now is the right time for me, I'm new to running my own practice and although I don't doubt my ability I don't have the resources, time or financial, at the moment that it would require. I think once I am more established I may look into it further.

    I only have one client currently who Is affected by IR35 but like everyone, need to be proactive and plan ahead.

    Huge thanks. Enjoy the weekend
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