What Exactly Is An Umbrella Company?
An umbrella company is a company that takes on contractors and handles administrative functions on their behalf, such as paying PAYE and NIC contributions and creating invoices, collecting payments and facilitating payroll to the contractor. The main function of an umbrella company is to provide administration duties to contractors. The contractor will pay a small fee for ongoing administration management to the umbrella company.
How Popular Are Umbrella Companies?
The amount of contractors who now work under an umbrella company has shown that the structure is gaining popularity in a rapid fashion as it has done since 2007 when tax legislation was tightened relating to composite structures. There are over 200,000 contractors in the UK working under an umbrella company and the numbers continue to grow every day. HMRC clarified when the crackdown on managed service companies and employee benefit trusts happened that umbrella companies were fully compliant with PAYE and NIC and as such they were considered safe. This confidence from the HMRC has given contractors the reason they need to create tax compliance for themselves through umbrella companies.
How Does the Umbrella Company Work?
Joining the umbrella company is quick and simple – all it takes is a simple phone call or email to sign up. A contract would be signed by you and HB similar to an employment contract wherein they agree to provide the umbrella company services of tax compliance, invoicing, payroll, insurance and related pension contributions and you agree to submit a timesheet once per week with your expenses clearly marked. After that all you need to do is concentrate on working and gaining new contracts. They would then release payments to you after all required contributions are taken care of leaving you fully compliant in the easiest possible way.
What are the Tax Advantages With an Umbrella Company?
Contractors are able to claim a number of expenses as they relate to the facilitation of their work. For instance, if you have to travel to a client’s office you can reclaim any travelling, food or accommodation expenses that you have simply by keeping your receipts and handing them in with your timesheet.
Is IR35 an Issue?
With an umbrella company IR35 will never become an issue as your PAYE and NIC contributions are made in line with Class 1 employment status which fully satisfies HMRC. As such, there truly is peace of mind in contracting under an umbrella company.
HMRC and Umbrella Companies
Since the 2007 Managed Services Legislation was enacted the stance of HMRC in relation to umbrella companies has been clear – with the exception of a limited company, ever other tax structure has been either shut down or regulated to create serious IR35 and third party responsibility for missed tax payments. Employee Benefit Trusts, Managed Services Trusts, Onshore and Offshore Umbrella Trusts and other tax vehicles have been identified by HMRC as in breach of expectations. At this time HMRC also clarified that it did not include umbrella companies in this category, since they paid PAYE and NIC contributions as Class 1 status, in line with the department’s full expectation.
You may think that you have found a better option through searching online and finding companies that offer insanely high retention rates through specialised tax vehicles – in the real world this means that your tax matters will not be taken care of fully, which is what would allow you to keep more of your money. This is not legal, and HMRC will catch up with you through whichever composite structure you choose. Since the 2007 legislation was introduced HMRC has full ability to collect on unpaid PAYE and NIC through contractor, agencies and even third parties who held involvement. In short, you may think you are getting away with something, but you will not get away with it for long.
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