Overview – employment structures
The world of work gets more complex with the passing of time. An organisation may have a fluctuating and unpredictable demand for personnel which it views as inappropriate to satisfy by taking on employees directly. This is because of the various legal obligations and personal expectations created by an employment relationship.
Therefore various alternatives to direct employment by the end ‘service-user’ have developed over time…
A/ Direct Self-Employment
A Temporary Worker could enter into an effective Contract for Services with the Service User whereby the work to be undertaken is more important than who actually does it. However for this to be effective – and not viewed by HMRC as disguised employment – there would have to be genuine rights to substitute the worker and / or be responsible for defective work and /or opportunity to profit from the contract etc. In other words, it is only appropriate if there is a real business relationship.
In these circumstances, a Direct Self-Employment relationship is only rarely used as a means of fulfilling a temporary staffing shortage.
B/ Direct Employment by Agency
This arrangement puts an effective buffer between the Service User and Temporary Worker. However the Agency then has the responsibilities of the Employer with the attendant legal obligations and expectations. These may not be burdens which it wants to take on as it is primarily an introduction intermediary.
C/ Personal Service Company
In contracting, a Personal Service Company is a limited company that typically has a sole director, the Temporary Worker, who owns most or all of the shares. This company then supplies the worker to Service Users, either directly or via an agency.
The company is therefore a corporate barrier between Temporary Worker and maybe several Service Users over a time period. It employs the worker and can pay them in the most tax-efficient way possible including a wide range of expenses. Because of the Income Tax and National Insurance savings possible, HMRC impose regulations (IR35) subjecting income to PAYE where a direct employment relationship would exist were it not for the company intermediary. It is therefore only worthwhile going to the trouble and expense of operating such a company if these regulations do not apply.
There are various features of contracting arrangements which can point to whether IR35 is inapplicable such as:
- Whether there is a right to substitute who performs the work
- If there is any retention on payment in case of defective work
- The possibility of gain / loss dependent on efficient working
- Whether equipment or other assets are supplied by the company and used in performing the contract
D/ Umbrella Company
An Umbrella Company is a company which is separately owned and operated, employs Temporary Workers and supplies them to Service Users – also either directly or through an Agency. It exists as the corporate barrier between the two and will have many workers who again may each have many end-user clients over a period of time. It will deduct a margin of the income derived but in return provide some benefits to its employees, including payment of tax-free expenses where possible.
Joining an Umbrella Company is straightforward and the administrative burden / cost is fully represented by the margin taken. It is therefore a trouble-free way of working but does not provide the same tax-saving benefits as the Personal Service Company (which may in any case be inapplicable to particular engagements). Additionally though this structure provides the corporate buffer between Temporary Worker and Service User / Agency which may be required as a condition for work.