Umbrella companies

The English umbrella company, a special form of Managed Service Company

Managed service company (MSC) is a generic term used to designate a company whose business model is based on intermediation on behalf of an individual contractual partner or on behalf of a group that hires this partner for an assignment. The MSC collects the fees and expenses owed by its contractual partner and pays the sums back to its client in the form of dividends/salary.

Those who use an MSC also have an important tax optimization goal. Indeed, one of the distinctive features of the English MSC system is that for most fee-based income, it considerably reduces the social security contributions due to the Internal Revenue Service.

This provision has been denounced as an unjustified tax largesse. In response, specific legislation for MSCs entered into force in April 2007. This legislation stipulates that all remuneration paid to MSC clients in the form of wages must be included in « employment income. »

The tax authorities have stepped up their monitoring of MSC operations. Because the umbrella company system is more legally regulated, it tends to be preferred to other MSCs.

UK tax authority vigilance about umbrella companies

The English tax authorities consider that employees are liable for any misrepresentation of income, especially about business expenses. The tax authorities operate under a « dispensation » system. This is a provision that benefits the umbrella company by transferring the burden of justifying expenses to the ported employee, with each expense subject to scrutiny by the administration.

English and French wage portage mechanisms resulting from legislation intended to modernize the labor market.

The umbrella company system, which began with the 1996 Employment Rights Act and was strengthened with the 2000 Finance Act in England, has grown since the introduction of the IR35 regulations governing the tax regime for independent workers, particularly for consultants.

In France, the wage portage ordinance adopted by the Government on April 2, 2015, enabled wage portage to be incorporated into the French Labor Code.

A slightly different wage portage relationship

In France, wage portage is a three-way relationship between the wage portage company, the ported expert and the company using the expert’s services (More information).

This system is also in force in the UK, but very often, it involves an additional intermediary who transforms the umbrella company system into a four-way relationship. (More information).

In addition to the three well-known players in France, « recruitment agencies » act as intermediaries between umbrella companies and ported employees. Ported employees, known as « contractors, » can thus come from two sources:

• from a recruitment agency
• from the independent source of consultants who have always invoiced their services

As part of their involvement in the portage process, some recruitment agencies also manage payroll, which requires them to have their accounting infrastructure. However, most agencies prefer to use the services of the umbrella company.

As in France, ported employees, who are known as « contractors, » provide the service*, fill out their timesheets and expense reports and submit them to the umbrella company.

Similar ways of operating

As with portage companies, umbrella companies process the timesheets for the services provided by the contractors, and then send the invoices to the clients. In return, umbrella companies provide ported employees with wage portage contracts, giving them the same social protection as any other employee: they become PAYE (Pay As You Earn) employees.

Umbrella companies handle the tax, accounting and social security issues.

Management fees in both systems: flat rate versus percentage

One significant difference is the practice of charging management fees. Whereas in France, Belgium or Sweden, a percentage is charged on the invoice, in the UK the portage fee is usually a weekly (or monthly) fixed amount agreed in advance. 

As a result, ported employees pay between £25 and £30 per week for a good-quality portage service. A few umbrella companies operate the « French way, » by collecting a percentage of their clients’ invoices. Those who choose this method negotiate the applicable rate directly with the ported employees, based on the services provided. 

English umbrella companies advertise the net amount of their management fees, including taxes, to provide a less expensive offer as part of their marketing strategy. 

An example of a « net management fee » calculation: an umbrella company that earns £26.50 per week before tax, deducts the 20% tax to show a management fee of £21.20.