When contractors come across umbrella companies purporting to offer a triad of benefits – specifically, HMRC approval, IR35 compliance and special expenses dispensations – their first response ought to be great caution. If umbrellas claim to offer these, then they are not being entirely straightforward. Here’s why.
Umbrella services play a valuable and crucial role in the contractor supply chain, giving a sound trading model to contractors who either do not want the hassle of starting and running a limited company or are working on a contract classified as inside IR35. They are also excellent solutions for those who want to work on a series of short-term projects between permanent jobs.
Be careful, however – while most umbrellas are reputable and honest, some make claims in their marketing materials that a charitable view might consider misleading and a more hard-headed view might regard as dishonest and worthy of a complaint to advertising regulators. The reasons are as follows.
When an umbrella makes a point of emphasising that contractors who use its services will remain “IR35 compliant”, it is engaging in double-talk. Because umbrella contractors have their income taxed on a PAYE basis, i.e. they pay the same tax and National Insurance Contributions (NICs) as conventional employees, being compliant with IR35 is already entirely irrelevant to them.
IR35 is relevant only to contractors who work through their own limited companies, and they may indeed use terms such as “caught by IR35”, “inside IR35” or “not IR35-complaint” to signal that the regulations do apply to their current contracts. In other words, when this arises, they lose the tax advantages associated with limited company directorship, and for the specific contracts affected they will pay higher taxes and NICs just as conventional employees do.
Umbrella company contractors know from the outset that they have the same tax status as employees, so it is irrelevant for umbrellas to make any mention of IR35 in their marketing materials at all. Such declarations are, in other words, advertising an empty or fake advantage.
Reputable umbrella companies strive to keep up to date and compliant with all tax, employment and company legislation as a matter of course. Some even work closely with central HMRC compliance departments and local revenue inspectors to ensure that their procedures and processes always stay fully compliant.
Some umbrellas willingly adhere to voluntary codes of conduct, such as those developed by the Freelancer and Contractor Services Association (FCSA), in addition to allowing external auditors to oversee their affairs and then passing on findings to HMRC.
However, there is one matter that you can be confident about: HMRC has never bestowed any form of privileged status on an umbrella company or any other contractor service provider. It never “accredits”, “certifies” or “approves” any particular service provider because it does not have the right to do so – and for a very good reason. HMRC must maintain supplier-neutrality for the sake of fairness, and conferring any form of unfair commercial advantage on any specific company would fly in the face of this.
Another misleading marketing tool used by some contractor service providers looks to persuade prospective customers that, due to the company’s granted dispensation, contractors will be able to claim expenses automatically without having to keep receipts. Some will even claim that contractors do not have to incur costs in the first place, as they have a right to claim expenses simply because of the dispensation.
This is blatantly false. If you neglect to keep all receipts of your work-related expenditures diligently, then you run the risk of getting into seriously hot water with HMRC should you become subject to investigation. Your stash of receipts is your incontrovertible proof that you genuinely incurred these costs purely for business reasons.
A dispensation only lifts the requirement for an employing entity such as an umbrella company or limited company to give an individual P11D form for each employee to account for the repayment of expenses when no tax is liable.
If a business can show any type of audit oversight, then it can receive a dispensation. Many limited companies qualify for this, so contractors who see claims of special status by umbrella companies simply because they have received dispensations by HMRC should be sceptical.
It is perfectly reasonable for contractors who know that their contracts are inside IR35 or who want to work flexibly without the hassle of setting up and running a personal service company to opt for an umbrella company. However, do not neglect due diligence.
Do not forget that for large numbers of contractors, umbrellas offer the best trading vehicle. Be intelligently sceptical and informed so that you choose only those umbrellas that genuinely offer the most authentic services.