Expense claims through an umbrella

[JeffreyC]

After yet another phone call about about this and being told yet again that it's a "con", I wish to reiterate the following points to all contractors working through an umbrella:

When you make an expense claim, you receive the benefit of this reducing your tax burden.

How does that work? Right, say your net income for the week is £1000

And you have an expenses of £150.

Normally you would be taxed on the full amount, i.e. £1000.

With expenses, we deduct those from your income to reduce the amount you're taxed.

e.g. £1000 minus £150 equals £850

So instead of being taxed on £1000 you're now only taxed on £850. Simple.

No, you don't get the full amount back. I mean, where do you think it comes from? The sky?

[Malvolio]

That's a damn good argument for running your own company, isn't it.

If I spend £150 on business and claim £150 expenses from MyCo, I get £150 back. Net result is zero cost/benefit to me so no tax. MyCo gets a reduction of £150 in its profits and hence £31.50 off its CT bill.

Your way it seems you spend £150 and get £30-ish back as a tax reduction.

I think I prefer my version...

[Beefy198]

Far be it for me to defend an umbrella Mal, but I still maintain that for some it's the right operating model.

Besides, they might not be able to claim expenses soon and then JeffreyC won't have to worry about this....

[samus72]

Originally Posted by Beefy198

Besides, they might not be able to claim expenses soon and then JeffreyC won't have to worry about this....

What do you mean??

[Malvolio]

Originally Posted by Beefy198

Far be it for me to defend an umbrella Mal, but I still maintain that for some it's the right operating model.

Besides, they might not be able to claim expenses soon and then JeffreyC won't have to worry about this....

Nothing against Umbrellas per se, since they are perfectly fine in what they do and many people prefer to work that way.

But the number of stories you hear about brollies bending the rules on expenses and contractors being imaginative in their claims, when the obvious answer is to go Ltd and gain about 15% net increase (you even make a gain if you're inside IR35 - which, of course, most people aren't... )without breaking any rules... well you have to wonder, don't you.

[lurch]

Originally Posted by Beefy198

Far be it for me to defend an umbrella Mal, but I still maintain that for some it's the right operating model.

Beefy198's not wrong, umbrellas may not be the most profitable method, but there are plenty of people who don't want to have to worry about their IR35 compliance or the other admin. Some guys would rather just rather be paid and have everything sorted for them.

If I'm honest I think if I were a contractor I would be one of them.

Originally Posted by Beefy198

Besides, they might not be able to claim expenses soon and then JeffreyC won't have to worry about this....

This is something they have been talking about, but I'm not of the opinion that they will go ahead with it, I think you will just see tighter rules and the loss of dispensations and scale rates for breaches of those rules.

I think right now the government wants to get the economy back on an even keel, and to do that they need money to flow freely. Messing about with expenses right now would not help that.

Back on topic, JefferyC has explained the umbrella expense situation as well as I have ever heard it explained, well done.

[Malvolio]

If I'm honest I think if I were a contractor I would be one of them.

Hell yes, it takes , ooh, an hour a week to manage MyCo. However do I manage...?

All I'm saying is that brolly users who then try and bend the expenses rules to gain a few quid when they can legally gain 15% net income with just a little bit of effort are probably not to be taken all that seriously.

[Bel]

Originally Posted by Malvolio

Hell yes, it takes , ooh, an hour a week to manage MyCo. However do I manage...?

All I'm saying is that brolly users who then try and bend the expenses rules to gain a few quid when they can legally gain 15% net income with just a little bit of effort are probably not to be taken all that seriously.

Hasn't it occured to you, Malvolio, that some flexible workers don't want to run a trading vehicle? I didn't for many years and it seemed a big step to take, when I did.

Brollie users comprise non-business and ex and potential owner managers. Not everyone wants the responsibility. Just because you find it easy, it does seems a hassle when you're not doing it, particularly if you've never run one.

I'd would also dissuade any flexible worker to start up a limited company as a convenient payment vehicle - to avoid IR35 or because they're a convenient option. If you really are as clued up on IR35 as you claim (not that there's much evidence of that), you should know why that is.

If you don't, I suggest you do your own research...

[dodgy_Dave]

Funnily enough I had a contractor call me once to query how his expenses worked. My reply was pretty much "don't talk to me guv, I'm not an accountant".

[Malvolio]

You use a trading vehicle becuase you have to unless you can source all of your own work directly - that's about 5% of the whole - or can work as a sole trader. If you use any kind of an agency to get you work, then you're kind of stuck with it.

In fact S44-7 IETPA (S143c as was) effectively forces agencies to interpose a company between them and the contractor (as I'm sure you know). Whether that is a LtdCo or an umbrella is immaterial: it's there to ensure the agencies don't get stuck with the contractor's tax bill when they fail to pay it for themselves, which used to happen a lot.

Neither are anything to do with IR35, which was a Primarola-inspired fudge at a stealth tax, driven by her ignorant and politically motivated insistence that people incorporated to save tax: good fun since she was about to do time for not paying taxes herself at one point. The tax avoidance argument is a myth that persists throughout Whitehall today and that we are finally getting through to the politicians.

Yes, you escape IR35 by using an umbrella, but since you are paying full PAYE and NICs plus the brolly's fees to do so and have increasing problems reclaiming legitimate business exepenses, that is something of a phyrric victory.

People keep saying "Don't want the bother of a LtdCo" and "Don't want to worry about IR35". Well that's fine and it's their choice. Effectively they become permie employees, so perhaps they could stop moaning about the lesser income they get as a result and stop trying to fiddle ways around it.