Umbrella firms and agencies have been called upon to work together closely to ensure clarity over contractor pay following the introduction of new changes to IR35 regulations.
Controversial new adjustments to the system governing IR35 liabilities have come into effect in the public sector today (April 6th 2017). A number of amendments were made to the planned changes a few weeks ago to address some of the more common criticisms, but it is still expected that the reforms may require a period of adjustment for contractors.
The Freelancer and Contractor Services Association (FCSA) has predicted that the changeover will undoubtedly lead to contractors deemed to be caught by IR35 working through umbrella firms, rather than being put on the payroll of clients or agencies.
Umbrella firms offer a potential solution to some of the issues created by the new IR35 rules since they employ contractors directly, providing them with the statutory rights and benefits of permanent employment, while also allowing them to carry out temporary assignments for various clients. There employees are paid via a real-time information (RTI)-based payroll system, ensuing that pay-as-you-earn levies and National Insurance contributions (NICs) are paid.
However, the FCSA pointed out that additional costs are incurred through RTI payrolls in the form of employer NICs, which cannot be deduced from employees’ gross pay, meaning the additional cost must be factored into assignment rates.
As such, umbrella firms have been encouraged to implement a thorough onboarding process that provides all the necessary information regarding assignment rates, pay rates and deductions. This makes thorough communication between agencies and umbrellas essential.
Julia Kermode, chief executive officer of FCSA, said: “Good communication throughout the supply chain is key to a smooth process and we want to encourage agencies to work with their umbrella firms on calculating the impact of employers NICs, the assignment rate and the resulting gross pay rate for contractors – so that workers are clear about what appears on their pay slip.”