The Secret Contractor: The Great Employment Costs Swindle

One particular impact not talked about enough, is that contractors are now being put into a situation that forces them to pay the client’s employment costs.

This is notably the case with central government departments. Most central government contractor roles are provided through a managed resource framework. This used to be the CL1 (contingent labour 1) contract with Capita, but in 2018, Alexander Mann Solutions was awarded its successor contract, commonly called Public Sector Resourcing (PSR).

The problem starts with how PSR handle arrangements under IR35.

Most candidates, like me, are pushed towards the umbrella company option with a clear statement that reads “Please note PSR can engage only with FCSA approved Umbrella Companies.” FCSA sounds official (not to be confused with the FCA – who are an actual regulatory body), but it is not subject to government oversight and the sector remains unregulated.

You then enter into agreements that comprise an umbrella company contract and an assignment schedule from PSR (which is also duplicated in the umbrella company contract).  A Key Information Document is also provided which highlights your rate of pay and other pertinent details.

This is where things get strange. 

When a day-rate is agreed with the client, agency and/or any other intermediary in between (e.g. £500 per day), a candidate would then expect to be paid £500 for one day, with deductions made for income tax and employee’s NI, along with any holiday pay allowance and perhaps a pension contribution. The umbrella company fee would also be deducted.

What actually happens is that from the £500 gross rate, employee costs such as income tax and employee’s NI are deducted, and employer costs such as employer’s NI and the apprenticeship levy are also deducted.

Through PSR, government departments are stealthily avoiding paying these employment costs. This happens because clients still expect to only pay the day-rate for temporary workers, just as they used to prior to the changes to off-payroll legislation in 2017. Clients have not been advised to accrue for employment costs on top of agreed day-rates for those temporary workers whose roles are deemed to be inside IR35.

Rather than educate them, employment businesses have implemented a workaround that penalises candidates.

Once a client has budgeted for say £500 per day for the required role, one of two approaches are taken:

1. £500 per day is offered to candidates. Employment costs are then wrongly applied to the worker’s income and results in the client avoiding taxes and the worker paying twice.
2. A lower day rate is offered to candidates to account for the employment costs, for example £424.75 per day.  Whilst this is not ideal either, it is at least clear to the candidate that they are being paid £424.75 per day and the only deductions will be their own taxes, not those of their client as well.

Clearly, in an umbrella relationship, the candidate is actually an employee of said umbrella company. However, in practice both the umbrella company and any employment business/agency in the middle are merely facilitators, and the payment flow to the contractor originates with the end-client. So, it stands to reason that employment costs should also be borne by the end-client and flow down the chain as necessary before ultimately being paid to HMRC.

Contractors are being swindled by this unfair practice and losing thousands of pounds in earned income as a result. Contractors need to resist these practices, which are unfair at best and unlawful at worst, and end-clients need to be educated on how to budget for their off-payroll workforce in the correct way.

Where a day rate has been agreed with the client, agency and umbrella company, then that is the gross rate a candidate should rightly expect.

The mantra “this is how it is for everyone”, often used to defend this practice, should be challenged and ultimately overturned.