The hidden dangers of Director Umbrella structures

Do you really know everyone on your Board of Directors?

Setting up as a contractor or becoming self-employed can be a minefield of information to get through. You need to put yourself in the very best position, right from the start.

Setting up as a contractor in Ireland is an exciting prospect, but it can also be a stressful and challenging time in many ways.
As well as securing an initial contract, transitioning from a permanent to self-employed status also brings about the conundrum of deciding the most suitable way of starting out in business life.
The main three types typically we at Accounting Pro Ireland advise on from an Irish perspective would be:

  • Personal limited company
  • PAYE Umbrella service
  • Sole Trader

As we have former contractors on our management team, we are very much aware of this and are intimately familiar with the entire process from foundation, to invoicing and much more.

There is also another option in the Irish market but we do not provide this – it is a Director Umbrella Company.
Essentially, this enables a contractor to become the Director of a Limited Company.
Usually this is a “shelf” or established company for the purpose of invoicing an agency on their behalf, generally speaking.
This is an attractive option as the contractor incurs zero set-up fee but would enjoy the benefits of a proprietary Director.
Such benefits may include executive pensions and a reduced PRSI, to name two.
However. to put this structure into an international perspective — it has been banned for quite some time in the UK.

So, why is this?

There may be the issues of compliance firstly which we at accounting pro can advise on.
As a director in this type of company, regardless of how active you are in the running of the company, you are liable for compliance.
Moreover, so are any other directors and those managing the company on your behalf — in this scenario.
So, although you are a director of the company, you are not directly managing it.

If something does go wrong you may not be aware of it, but are still be liable under current laws in the Republic of Ireland.
Also, from a corporate governance viewpoint — this structure is not compliant.
Governance states that you must personally know every director in your organisation.
If you are a contractor in a 50 or 100 person company structure how can this be so? Exactly, it doesn’t fit.

Also, from a GDPR it doesn’t seem to work. If any Director within the structure has a gated breach i.e. their details are hacked there is an obligation to inform all relevant Directors with 72 hours but if you don’t know who they are how do you do this? There are also issues related to privacy, consent and the right to be forgotten when it comes to GDPR. For example, if you leave the Director Umbrella structure you have a right for your data to be deleted but how can that work from an accounting and audit perspective? In short, it appears unclear how this structure can work with GDPR.

Finally, as a contractor you may find that initial contract becomes multiple concurrent contracts of service and a more regularised business so ultimately, you will want your own independent company.
In time, may this employ people and become a viable business in its own right with goodwill attached.
If you want to see it how would this be possible to set up a personal Limited company – then contact us today at Accounting Pro Ireland and we will be delighted to help you.
Our unique experience puts us in a position to be in the best possible place to help, right from the start.

About the author: Kevin Deasy