by Dawn Ford
The Conduct of Employment Agencies and Business Regulations were introduced in 2003. The aim of the legislation was to regulate the recruitment industry and detail the minimum standards that end clients, agencies and candidates are entitled to expect.
When the legislation was introduced, there was a lot of discussion about whether or not the legislation was appropriate for every type of contractor. Obviously, someone loading warehouse shelves on minimum wage needs much more protection than an IT contractor earning £1000 a day.
So as a consequence, when the law was introduced, if a contractor worked through an umbrella or through their own limited company they were given a choice. They could either accept the protections given to workers in the legislation through opting-in, or reject the protections in the legislation by opting-out.
Now I know what you are thinking. Why would anyone offered protections through law, choose to reject those protections?
The key protection in the legislation is the right to guaranteed payment, even if the client refuses to pay for the contractor’s work. This is obviously a very important right because payment is, understandably, usually the right that everyone feels most strongly about. Alongside this right there is also a right to understand what terms the agency will require you, the contractor, to work under and the right to understand the health and safety risks of the role.
The benefit of guaranteed payment amounts effectively to being treated as an employee and thus the contractor would then, in general, be taxed like an employee. And thus, if you opt out, that can be beneficial from a tax perspective.
Whether or not it is a benefit, and to what extent, will differ from person to person and contract to contract. Most people do opt out - it varies a bit from industry to industry but roughly speaking 95% of people who are eligible to opt out, do so.
So the question now is what does this mean for you?
If you’re working through an umbrella company, and employed, it's likely that you will already have the right to guaranteed payment via your contract with the umbrella company, so probably the choice doesn’t make that much difference to you.
By contrast, if you’re working through your own limited company, enjoying a higher rate of pay, quite possibly the trade-off of risking occasional non-payment might be worth taking, to help secure a more beneficial tax position. But everyone’s situation is different, and if you’re unsure, please take advice from your accountant or lawyer to be sure you make the choice that’s right for you.
For more detail, below is a link to the law itself.