What Freelance Contractors Should Know About Umbrella Companies (Feature)

[UKFF Mod]

If you are a freelance contractor and need to learn more about umbrella companies then you'll want to read this article. I'll be discussing what umbrella companies do, where they came from and the five key questions to ask before joining one. After reading this article you'll be an umbrella company expert - I promise...

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If you have any comments to make about this article feel free to start the debate below!

[Malvolio]

An umbrella company offer a simply 'pay as you go' payroll alternative to freelance contractors in the UK wishing to work through their own limited company as opposed to PAYE at the recruitment agency or end client. A traditional umbrella company employs hundreds if not thousands of contractors, paying them on a weekly basis following the submission of a timesheet. The main tax advantage for contractors is that they are able to offset the cost of their travel and substance expenses against their taxable pay. This equates to a higher net take home salary.

First bit - what limited company? You become an employee of the umbrella

Second bit - expenses = salary? I thought we'd put that hoary old myth to bed ages ago.

And "compliant" with what, FFS? Please don't say "IR35", because that is utterly irrelevant to Umbrellas.

A more intelligent guide can be found here...

[Lance Hooper Bartlett]

First bit - what limited company? You become an employee of the umbrella

True, but it’s a limited company that is separate to either the client or agency. Most umbrella contractors refer to the umbrella as “their own limited company” even though they don’t actually own (shareholder) or control (director) it.

Second bit - expenses = salary? I thought we'd put that hoary old myth to bed ages ago.

Not sure I understand this one. If contractors are able to offset the cost of their T&S expenses then they’re going to take home more than they ordinarily would if they weren’t able to. Are you unhappy with the terminology?

And "compliant" with what, FFS? Please don't say "IR35", because that is utterly irrelevant to Umbrellas.

Umbrellas ARE compliant under IR35. They’re also compliant under the MSC legislation and so on. Again, it’s a terminology thing. Recruiters are always asking whether my structure is compliant and when they do so, they’re usually referring to either IR35 or MSC. You may be surprised to hear that I don’t actually work through an Umbrella but I do genuinely think they provide a good service to contractors that need them, hence the article

Lance

[Malvolio]

The implication is that they are operating their own comapny with all that implies in terms of control, whereas in fact they are simply an employee with a variable list of employers. An employee who is also liable for funding hidden extras Employer's NICs, gross expenses and holiday pay, by the way...

I and many other take serious exception to any direct association between "expenses" and "take home salary". Any umbrella advertising on that basis is being disingenuous at best. Add in that HMRC are trying to decide if umbrella employees are actually entitled to expenses that other salaried employees aren't, and it gets even more marginal. Umbrellas should advertise on the basis of fees charged and services rendered, not expenses reclaimable.

It is also a bit wrong to say an umbrella is IR35 compaliant. IR35 is completely out of scope since the umbrella user is already paying full PAYE and NICs, so cannot possibly be done for IR35. What you also fail to mention is that LtcCo and IR35-caught still returns more income than an Umbrella while also being fully compliant. Come to that, so is LtdCo and not IR35-caught: compliant only means you've applied the rules correctly (or as correctly as anyone can).

Yes, umbrellas deliver a good service and are a totally suitable vehicle for some classes of contractor. But they are also the most expensive route, something you don't often see pointed out.

[Light_Box]

Originally Posted by Malvolio

The implication is that they are operating their own comapny with all that implies in terms of control, whereas in fact they are simply an employee with a variable list of employers. An employee who is also liable for funding hidden extras Employer's NICs, gross expenses and holiday pay, by the way...

I and many other take serious exception to any direct association between "expenses" and "take home salary". Any umbrella advertising on that basis is being disingenuous at best. Add in that HMRC are trying to decide if umbrella employees are actually entitled to expenses that other salaried employees aren't, and it gets even more marginal. Umbrellas should advertise on the basis of fees charged and services rendered, not expenses reclaimable.

It is also a bit wrong to say an umbrella is IR35 compaliant. IR35 is completely out of scope since the umbrella user is already paying full PAYE and NICs, so cannot possibly be done for IR35. What you also fail to mention is that LtcCo and IR35-caught still returns more income than an Umbrella while also being fully compliant. Come to that, so is LtdCo and not IR35-caught: compliant only means you've applied the rules correctly (or as correctly as anyone can).

Yes, umbrellas deliver a good service and are a totally suitable vehicle for some classes of contractor. But they are also the most expensive route, something you don't often see pointed out.

forgive me for asking a silly question but why is it that HMRC are apparently targeting umbrella companies for paying tax free expenses but not, in your words, LtcCo contractors? Surely a temporary workplace is the same regardless of whether you work Umbrella or through your own limited company.

Thanks
LB

[Malvolio]

Originally Posted by Light_Box

forgive me for asking a silly question but why is it that HMRC are apparently targeting umbrella companies for paying tax free expenses but not, in your words, LtcCo contractors? Surely a temporary workplace is the same regardless of whether you work Umbrella or through your own limited company.

Thanks
LB

Ah but, where is an umbrella users permanent workplace? Mine is my registered office, and there you will find quite a bit of substantive work going on (especially right now!) related directly to my business. Also, as we have seen recently, an umbrella user who only had one workplace during his time with them has been refused expenses on the grounds that since there was only one workplace, it must be his permanent one.

The HMRC lkine seems to be that since the umbrella user doesn't have a place of work at all, and it's clearly not the umbrella's head office, then wherever he is working must be his permanent place of work and hence not allowable agaisnt expenses.

Stupid argument if you ask me, but Hector wants all the income he can get, regardless of how fairly defined.

[Light_Box]

Originally Posted by Malvolio

Ah but, where is an umbrella users permanent workplace? Mine is my registered office, and there you will find quite a bit of substantive work going on (especially right now!) related directly to my business. Also, as we have seen recently, an umbrella user who only had one workplace during his time with them has been refused expenses on the grounds that since there was only one workplace, it must be his permanent one.

The HMRC lkine seems to be that since the umbrella user doesn't have a place of work at all, and it's clearly not the umbrella's head office, then wherever he is working must be his permanent place of work and hence not allowable agaisnt expenses.

Stupid argument if you ask me, but Hector wants all the income he can get, regardless of how fairly defined.

umm, this is interesting, thanks Malvolio. Out of interest, why do you think HMRC didn't legislate against Umbrella Companies at the last Budget? If, as you say, they want all the money they can get, surely this is a "low hanging fruit"?

Thanks
LB

[Malvolio]

Originally Posted by Light_Box

umm, this is interesting, thanks Malvolio. Out of interest, why do you think HMRC didn't legislate against Umbrella Companies at the last Budget? If, as you say, they want all the money they can get, surely this is a "low hanging fruit"?

Thanks
LB

Good question. I think you'll find the intention to follow it up somewhere in the Red Book; it's wrapped up in the plans for "overarching employment contracts" which has led to a consultation paper. Expect to see something in the next budget, if they survive that long, either banning expenses or umbrellas altogether or adding some very tight controls and compliance checks.

[Azazel]

Would it be out of order though to mention that maybe many contractors pay more tax anyway, even with utilising expenses through an umbrella?

[Malvolio]

Originally Posted by Azazel

Would it be out of order though to mention that maybe many contractors pay more tax anyway, even with utilising expenses through an umbrella?

Not at all. I ahd the "zero tax paying scumbag" conversation with a middle manager type in my local a year or two back. I pointed out my total tax payments for my last trading year - CT, PAYE and NICs - comfortably exceeded his gross annual salary. If I'm a tax dodger, I'm clearly a very bad one...