The growth in the use of contractors, especially in the IT industry of the late 1990s in the UK, was the cause of the rise in them using companies for tax planning purposes. The types of companies used by contractors were different, as they were usually performing the work of a single client.

The HMRC brought IR35 legislation into effect in 2000, to be able to effectively tax such contractors.

Contractors thereby started creating two types of companies to prevent themselves falling under IR35 legislation, namely Personal Service Companies (PSCs) and Managed Service Companies (MSCs). A personal service company (PSC) is owned and operated by the same person, in many cases the same shareholder and director. A managed service company (MSC) is a company where the shareholders and directors are also the workers in the company. In almost all cases, PSCs and MSCs normally do all their work in a financial year for a single client.

More recent IR35 legislation after 6 April 2021 has significantly reduced the criteria which enable companies to operate as PSCs or MSCs. If they cannot operate that way, they are supposed to go under IR35. The only other way to avoid IR35 classification is to operate under an umbrella company. If one still operates under a service company and HMRC decides later it was not to have done so, it may have be liable to backdated tax and a fine.

The Gender Pay Gap Service, or Government Equalities Office monitors pay data on businesses in the UK. National data has been monitored by the Equality and Human Rights Commission (EHRC) since 1970, so the median thread has been monitored every year to observe and report on the difference in gender pay. National data has shown the median difference has improved from 47.6% in 1970 to 16.8% in 2016.

The Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 apply to all employers in the private sector with 250 or more employees. Such businesses are required to publish their gender pay data every year, such data is collated by the ECHR on the gov.uk website. Employers are to report such information within twelve months of the end of the tax.

Publishing pay data is compulsory for large companies, failure to do so may result in court proceedings and a fine.

The steps qualifying businesses are to take with respect to Gender Pay Reporting are:

1. They are to find out if they must definitely report on their pay.
2. They are to check on the deadline for reporting their payroll.
3. They are to find out about information to be reported.
4. They are to make calculations which will be detailed in the report.

The six main calculations which are required to be submitted in annual reports are to detail the following figures:

• Average gender pay gap as a mean average.
• Average gender pay gap as a median average.
• Average bonus gender pay gap as a mean average.
• Average bonus gender pay gap as a median average.
• Proportion of males and females categories receiving bonus payments.
• Proportions of males and females grouped into four quartiles from lowest to highest rates of pay.

Apart from reporting data, businesses are expected to liaise with the Gender Pay Service on how to improve prospects for women employees.

In spite of the progress and enlightenment of the 21^st century, modern slavery is a global problem in this day and age. It is estimated according to a 2016 study, at any given time over 40 million people worldwide were in modern slavery, with about 60% in forced labour and about 40% in forced marriages. Over 70% of the people under such conditions are believed to be women and girls, much of modern slavery takes the form of human trafficking.

Due to these rises, the Modern Slavery Act 2015 was published on 10 June 2014. This Act gives law enforcement in the UK tools to fight modern slavery and punish perpetrators. This is done by consolidating Slavery offences and simplifying offences into a single Act. Also, it helps guide the judiciary system in giving perpetrators suitable sentences under the law.

The Act requires all businesses which employ individuals not to partake in any worker exploitation. Also for businesses to ensure salaries are at par with employment duties. Moreover, the work conditions are to be conducive for the labour carried out. If the business is above a certain size, it is to disclose each year actions it has taken to ensure there is no modern slavery in their business and supply chains. This statement is to be made in accordance with section 54 part 6 of the Modern Slavery Act 2015

In the course of performing temporary business, there is sometimes a blur between employment and self-employment. It can cause confusion for clients or contractors when taking on labour to assist in the performance of their tasks. As a result, the HMRC has set up some rules to be used as a guide to help clients determine whether the subcontracted labour can be classed as employed or self-employed, thereby exempt from PAYE.

Individuals and their employers may have to pay unpaid tax and penalties or lose entitlements to benefits if their employment status is wrong.

To be employed involves having a contract of service with an employer, therefore the employee is paid in a set period and amount to perform certain duties. Taxes and national insurance are deducted of the source from employee wages, also the employee is paid for duties, regardless of how they have performed or how well the business is performing.

A person is self-employed if they run the business for themselves and take responsibility for its success or failure. Self-employed individuals are not paid through PAYE, also do not have the rights and responsibilities of employees. It is a contract of services.

An individual can be both employed and self-employed at the same time, if they work for an employer also run their separate business outside their employment hours.

The main criteria used to determine if a subcontractor is self-employed are if they:

1. Can work for more than one client at the same time.
2. Decide what work to do and when, where or how to do it.
3. Can hire someone else to do the job.
4. Are responsible for fixing any unsatisfactory work in their own time.
5. Provide tools and equipment for their work.
6. Set the prices for their services with the client concerned.
7. Can choose which jobs to take on and refuse.

If an individual can satisfy all or almost all the criteria above, they can be classed as self-employed, therefore will not be subject to the restraints of employment.

Employment contracts outline the terms and conditions an employee works under the employment of a business.

In the UK every employee is to be given an employment contract within 2 months of the commencement of their employment.

Every employment contract is expected to contain some statutory terms. e.g. job description, rate of pay, holidays, sick pay, notice periods, etc. When an employee is working under an umbrella company, the employment contract may be different from the norm, as it will only apply to the time the employee is actively doing shifts for the employer.

Job Title/Description – Will depend on the duties carried out by the employee for the business concerned. The employee may use the same umbrella company for more than one business, therefore job titles and descriptions may vary per business.

Pay Rates & Place of Work – These will depend on the business locations and arrangements employee makes with the business where the service is being provided. The umbrella company does not determine neither in many cases, as this will usually be determined by the employee and the client employer. The umbrella company only enters rate and details in employment once notified.

Holidays, Absences & Paid Leave – Normal UK contracts of employment allow for four weeks paid leave every year. Umbrella companies do not put restrictions on the amount of time an employee can be off work. If an employee wants a paid holiday, in many cases umbrella companies give them to option of holiday deductions from their salaries, which are paid to the member of staff at the time of their holiday.

Statutory Payments – As per normal contracts of employment, statutory payments ie SMP, SAP, SSP, SPP, are paid to employees of an umbrella company if they meet the statutory requirements laid out by HMRC.

Pension Contributions – The Pension Regulator (TPR), which is the UK regulator of workplace pension schemes, requires that every business employing staff gives them the option of paying into a work place pension scheme. Therefore umbrella companies create such schemes as per the TPR and their contract terms, however it’s at the discretion of the employees whether or not to opt for them.

Notice Period – Umbrella companies normally do not require employees to give notice periods when they are leaving, unlike regular employers, those under an umbrella company can leave without any notice, their contracts normally reflect that fact.

Complaints Procedures – These are different from regular employment. Employees usually have grievances against umbrella companies if they are short paid or cannot get their information required or salaries on time. Umbrella companies may take action against staff if they have presented dishonest information, been threatening to office staff or brought the umbrella company into disrepute.

In summary, the terms and conditions laid out by an umbrella company for its staff are only applicable when the employees work under the company.

The Pension Regulator (TPR) is the UK regulator of work based pension schemes. Under the Pension Act 2008, TPR requires every employer in UK to put staff in a scheme and contribute towards it. This practice is called automatic enrolment. The employer must at least employ one member of staff to fall under the law.

There are two types of workplace pension schemes, a defined contribution pension scheme, the other type is a defined benefit pension scheme.

A defined contribution scheme is a pension pot based on how much is paid in. A defined benefit pension scheme is one where the amount you’re paid is based on how many years you’ve worked for your employer, also the salary you’ve earned. In this case, the employer is responsible for ensuring there’s enough money at the time you retire to pay your pension income.

Due to the number of staff employed, umbrella companies create such schemes. They also give staff the option to pay into their created schemes. In many cases, if staff pay into the scheme, employers also contribute to them on behalf of the staff e.g. staff may pay 5% of their wages, employers pay 3% of the staff wage. The percentage amount employers pay into a staff’s pension scheme is set by the HMRC.

The Pension Ombudsman regulates the affairs and handles complaints about all the pensions schemes in the UK. The only problem with staff paying into pension schemes in umbrella companies is they may not spend long periods in employment, which results in employees having contributions into various schemes for short periods.

For further information on pension schemes, call them on 0345 600 1011, visit autoenrol.tpr.gov.uk, or email cande@autoenrol.tpr.gov.uk. You can also write them at:

The Pension Regulator
P O Box 332
Darlington
DL1 9PS