While limited companies offer attractive tax efficiencies to contractors, those will disappear instantly if the contract is considered one of employment for tax purposes under reformed IR35 rules. If that turns out to be the case, or you’re just starting out as a contractor and are unsure if you’ll return to conventional employment, or if you simply don’t want the hassle and cost of being responsible for your accounts, an umbrella company may be the best option for you. They’re not as tax efficient as a limited company (you’re considered an employee of the umbrella service and you’ll be taxed as such on a PAYE basis), but they do permit you to work as flexibly as any other contractor. Umbrella companies also take full responsibility for all accountancy admin, paying you regularly and on time for work completed.
If umbrella is the way you want to go, your next challenge is to work out which one will suit you the best. Here are ten tips to ensure you find the optimal umbrella solution for your circumstances.
If you know you can handle the administrative obligations that come with running your own business and you like the idea of paying yourself through dividends and saving on employee-level income tax, a limited company might be the best bet for you. But bear in mind that reformed IR35 rules introduced in the public sector in April 2017 have complicated limited company contracting significantly. If your contract falls within these regulations, you’ll be faced with two options. You can either join your client’s payroll as an employee or continue to work flexibly but lose the tax advantages of working through a limited company (and you’ll receive none of the statutory employment benefits that the extra tax is intended to fund, such as paid holiday and sick leave and paid maternity/paternity leave). An umbrella is a good option if you want to continue working flexibly under these conditions. It may also be suitable if you simply want to be free to work flexibly in the specialisation you love without running a business and shouldering all the mandatory paperwork that entails. Be sure to talk to some umbrella companies and a contractor accountant and explain your circumstances before you make a decision.
If you’ve decided to take the umbrella company route, don’t settle for its marketing blurb. Find out about its background. Research how long the company has been in business and look closely at its credit rating. Ask a crucially important question: does the umbrella company move money offshore at any point? HMRC inspectors are highly suspicious of umbrellas that do this, as they are often seen as tax avoidance schemes, which could land you in very hot water (you might be expected to pay back huge sums of unpaid tax money that the taxman decides belongs to the Revenue as a result of offshore arrangements that disguise true earnings, such as paying you in the form of “non-repayable loans”). If the umbrella does move money offshore, it’s best to avoid it. There are plenty of reputable, compliant alternatives to choose from.
Unfortunately, some umbrellas are somewhat opaque about their fee structures. Ask exactly how much you’ll be paying in fees each week or month. If they seem reasonable to you, don’t sign on the dotted line just yet. Find out whether the fees are inclusive, or whether you’ll also be charged for extras such as processing your expenses and filling out your tax forms. If these all come as free services, ask how the umbrella can afford to offer them (if those costs are factored into the overall fee, and it still seems reasonable, that’s an encouraging sign).
As mentioned earlier, when you sign up with an umbrella company you become one of its employees. And that means you’re entitled to a full contract of employment from the firm granting you all the statutory employment rights a conventional employee in the UK would enjoy. Make sure you check that you will be given a full contract of employment before you sign up.
Some umbrella companies make rather grand claims about how much tax their contractor-employees can save by claiming travel and subsistence expenses without the need for producing receipts. That should alert your suspicions and prompt you to delve a little deeper. Receipts are essential. If the umbrella company you’re considering is being so openly non-compliant on this issue, it raises immediate questions about what else they’re not complying with. Don’t be fooled by marketing blurbs about dispensations from HMRC. This doesn’t mean you can claim expenses without receipts; it simply means that the umbrella is not obliged to complete a P11D form for each of its contractors.
You’ll be required to submit weekly timesheets for work completed. Ask about how quickly you’ll receive payment after submitting your timesheet and check if there are “pay when paid” clauses in the contract. If there are, you could be waiting weeks before being remunerated. Such clauses wholly contradict the fact that you are an employee. The company should always pay you on time, regularly and collect its own payments from the end client. Umbrella company employee status also qualifies you for the national minimum wage, holiday and sick pay. If they’re not on offer, the umbrella is non-compliant and should be avoided.
There is some paperwork required of you as an employee of an umbrella company. You may, for example, have to submit a tax return and, if the umbrella you’ve chosen does not have a dispensation from HMRC, you may also be required to complete and submit a P11D every year to account for all of your expenses. The umbrella should also provide you with a P60 every year (and it’s worth checking that it’s included in your regular fee).
You should not be charged any form of exit fee, just as you wouldn’t if you were an employee moving on to a different employer. But be clear about terms and conditions of employment, which you’re obliged to adhere to, as these will give details of notice periods and termination clauses. Some umbrellas withhold money to pay for annual leave periods. If you have a surplus in the event of leaving the company, you should request that this is reimbursed to you in your final payment.
While the chances are that you’ll embark on a long and mutually beneficial relationship with your clients, it’s in the nature of human endeavours that, on occasion, things go wrong. On such occasions, you may be grateful for help and support from your umbrella firm. If, for example, an employee of one of your clients maliciously or unfairly accuses you of some form of misconduct, you could face a stressful and painful time before it’s resolved. Reputable, compliant umbrella companies should provide you with support and practical counsel via their HR departments and may even represent you, if it came to it, at a tribunal.
Read it thoroughly, because it can help you avoid a costly mistake and help you identify the best umbrella provider for your own unique circumstances.