For an umbrella company, keeping up to date with relevant HM Revenue & Customs (HMRC) legislation changes is essential. Failing to adhere to the regulations set by the HMRC can lead to issues such as fines and other penalties.
Recent changes to HMRC legislation that umbrella companies should be aware of include the following.
Overarching Contracts of Employment
Most of the recent changes the HMRC has introduced are related to overarching contracts of employment. This type of contract ensures that a contractor becomes a permanent employee under an umbrella company.
The main reason for this is travel expenses. These are only payable if a contractor is deemed to be travelling to a temporary workplace. HMRC’s official definition of this is as follows:
“A workplace is a temporary workplace if an employee goes there only to perform a task of limited duration or for a temporary purpose. So even where an employee attends a workplace regularly, it will be a temporary workplace and so not a permanent workplace, if the employee attends for the purpose of performing a task of limited duration or other temporary purpose.”
Contractors will often work in different locations as assignments finish and new ones begin.
Under this definition contractors are required by HMRC to be connected under a single employer. An overarching contract of employment allows this to happen.
ESM2035 – Overarching Contracts of Employment – Mutual Obligation and legal position
The first change to overarching contracts relates to an umbrella company’s legal position regarding said contract. Umbrellas must ensure there are mutuality obligations in place for the spaces between work assignments. These should relate to the provision of payment for the work performed by the contractor. Without this in place an overarching contract fails to meet contractual obligations set by the HMRC.
Once these mutual obligations exist and the umbrella company has a some control over the worker and gaps between their assignment, the contract becomes an overarching contract of employment.
Terms and conditions must also adhere to employment contracts as defined by the HMRC.
ESM2045: Overarching Contracts of Employment – Guaranteed Minimum Hours
An employer must guarantee an employee a minimum number of hours over a 12 month period. This contractual agreement should act sufficiently as a mutual obligation to cover a contractor’s gaps between assignments.
This is the equivalent of the employer paying a retainer – a guarantee of remuneration whether or not there is work available. If an employer does not provide a guaranteed number of hours then the umbrella company must pay for the balance of hours they have not provided at the national minimum wage rate.
ESM2065: Miscellaneous Contractual Issues – Apportionment Act 1870
Some overarching contracts of employment may contain the clause stating: “The provisions of the Apportionment Act 1870 shall not apply to this contract.”
This clause does not directly concern itself with any obligation to provide work to a contractor. Its meaning is related to an employee or contractor’s right to pay. The accrual rate is judged on a daily basis. If this clause is present it does not obligate an umbrella company to provide work for a contractor.
ESM0543: Guide to determining status: mutuality of obligation
Contracts must include the following mutual obligations in order for them to qualify as contracts under HMRC Registration:
• that the engager (in this case the umbrella company) must be obliged to pay a wage or other remuneration,
• that the worker must be obliged to provide his or her own work or skill.