Umbrella company
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In the United Kingdom, an umbrella company acts as employer to independent contractors who work under temporary contract, usually through a specialist employment agency. Recruitment agencies will only issue contracts to a limited company. Since the introduction of the Managed Service Company (MSC) legislation in the budget 2007, the only way an independent contractor can comply with this requirement is to set up his or her own personal limited company or use an umbrella company. An umbrella company issues invoices to the recruitment agency (or client) and, when payment of the invoice is made, will typically pay the contractor through PAYE (although historically the term has also been used for salary and dividend type payment structures).
Umbrella companies have become more prevalent since the British government introduced so-called "IR35" legislation that creates tests [1] to determine employment status and ability to make use of small company tax relief's.
Before IR35 was introduced, workers who owned their own companies were allowed to receive payments from clients direct to the company and to use the company revenue as would any small company. Company profits could be distributed as dividends, which are not subject to National Insurance payments . Workers could also save tax by splitting ownership of the company with family members in order to place income in lower tax bands.[2]
In December 2006, the UK Treasury introduced the above-mentioned draft legislation "Tackling Managed Service Legislation," which seeks to address the use of "composite" structures to avoid income tax and National Insurance on forms of trading that the Treasury deem as being akin to being "employed." After a period of consultation and re-draft, the new legislation became law in April 2007, with additional aspects coming into force in August and fully January 2008. PAYE umbrella companies are effectively exempted from the legislation, which also seeks to pass the possible burden of unpaid debt (should a provider "collapse" a structure) to interested parties, e.g., a recruitment agency that has been deemed to encourage or facilitate the scheme [3].
The 2008 HM Treasury Pre Budget Report [4] reported on the consultation on the use of travel expenses in conjunction with being employed via Umbrella Companies [5]. The document questioned the validity of fairness of allowing business expenses in this form suggesting that an overarching employment contract was not a form of employment that allowed travel and subsistence expenses. HMT decided that the legislation would remain as is but suggested additional HMRC policing would be carried out to reduce cases of non-compliance. HMT issued the results[6] of the consultation in December 2008.
Whilst many of the umbrella companies advertise similar offerings, much of the detail should be checked by the user. Often expenses are used as a selling point with potential abuse of "dispensation" (HMRC issue documentation to employers as a more effective way to record Expenses rather than as a method of generating more income) agreements. It is the independent contractor who will be liable should HMRC decide, for instance, that expenses have been incorrectly claimed.
Some of the most common ‘allowable’ expenses include: Mileage & general travel expenses, Hotel & accommodation expenses and Professional Subscriptions.
Food and sustenance is rarely allowed to be claimed, as it is the HMRC's opinion that you would eat regardless as to whether you are working or not. The exception to this rule is if you were staying away from home as part of your work.
All Umbrella Companies use the same PAYE calculations [7] to ascertain how much tax should be paid. The only difference between Umbrella Companies will be the fee that they charge and the level of service that they offer you.
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[edit] MSC and Umbrella
Umbrella company is often confused with Managed service companies (MSC). Umbrella companies will not fall under the definition of MSC. For a company to be a Managed Service Company it must fulfil all four conditions of Section 61B (1), Chapter 9, Part 2 ITEPA. Umbrella companies do not satisfy the third condition.
i.e.,
“The payments received by the worker are greater than they would have received if all of the payments were treated as employment income of the worker relating to an employment with the service company.”refer HMRC link
As umbrella companies do not pay dividends and consider whole income as employment income. They are not Manage service companies.
[edit] Dispensation
One of the most frequently associated concern with umbrella companies is the dispensation scheme. Its often thought that an umbrella company with dispensation is better than others as it has a special agreement with HMRC. However its not true.
Dispensation is a notice from HM Revenue & Customs (HMRC) that removes the requirement of employer (umbrella company) to report expenses and benefits to HMRC. Umbrella company can also agree to pay the expenses by scale rates. This requires the company to conduct a survey of employees expenses and pay them based on rates derived from the survey. If the umbrella pays by scale rates they need not have to verify the expense bills (receipts) and report it to HMRC. The onus is on the contractor to maintain the receipt and submit it to HMRC.
Dispensation with scale rates in some sense is disadvantageous to contractors. As one of the [umbrella company] claim dispensation is risky, in the event of investigations from HMRC, umbrella companies without dispensation will need to produce recipets and defend how they verified bills. Hence they come in handy as a first line of defence for contractors. As dispensed umbrella companies are not maintaining the receipts, complete responsibility lies with contractors. Contractors will loose this if they opt to go with a company which has dispensation agreed.
[edit] Charges
Umbrella companies normally charge a small fee for processing contractors payroll. Most of the umbrella companies advertise two types of charges.
Gross charge: fee that is deducted before tax. This is the actual charge that umbrellas deduct.
Net charge: for marketing reasons many umbrella companies list their net charges i.e. equivalent charges of Gross charge ‘after tax’. This is to make charge appear small.
Calculations of Net charge are simple. For example, if an umbrella charges gross 26.5 per week before tax. The net equivalent of this amount is,
If contractor is a basic rate tax payer (i.e 20% tax) : 26.5-0.2x26.5= 21.2 pounds
If contractor is a higher rate tax payer (i.e 40% tax) : 26.5-0.4x26.5= 15.9 pounds
There is small faction of umbrella companies that charge a percentage of contractor’s earnings e.g 15% of contractor earnings.
[edit] List of umbrella companies(Lowest fee first )
This list is ordered in the ascending order of their gross charges.
| Company Name | Joining offers | Charges | Website | |
|---|---|---|---|---|
| Monthly Invoice | Weekly Invoice | |||
| Ganumbra [, Umbrella company] | FREE for 5 years | £10 | £2.5______________(£10/month) | [[8]] |
| Carrington | - | - | £7.65_____________(£30.6/month) | [9] |
| My Key Pay | - | - | £8________________(£32/month) | [10] |
| Nasa Umbrella | - | - | £9.99_____________(£39.96/month) | [11] |
| Bbuffalo | - | - | £13_______________(£52/month) | [12] |
| Eagle Umbrella | - | - | £17.5_____________(£70/month) | [13] |
| Sterling Solutions | - | - | £18.10____________(£72.41/month) | [14] |
| Drole Computing Services | FREE 1 month trial | £76 | £19_______________(£76/month) | [15] |
| A2Omega | - | £70 | £18.9_____________(£75.6/month) | [16] |
| Moneybox5 | - | 60 | £19.95____________(£79.8/month) | [17] |
| Nova Contracting | - | _ | £20.75____________(£83/month) | [18] |
| Brookson | - | £80 | £21_______________(£84/month) | [19] |
| Orange Genie | - | £90 | £21_______________(£84/month) | [20] |
| GoUmbrella | - | £80 | £20_______________(£80/month) | [21] |
| Danbro | - | £68 | £22_______________(£88/month) | [22] |
| Independent Contractor Services | - | 65 | £22_______________(£88/month) | [23] |
| PayeRise | - | - | £22_______________(£88/month) | [24] |
| Umbrella Staff | - | - | £24 to £28________(£96/month) | [25] |
| Focused consulting | £50 | £64.5 | £24.5 ____________(£98/month) | [26] |
| Mimax | - | 75 | 25________________(£100/month) | [27] |
| Pacific Umbrella | 2 Months free trial | 80 | £25 ______________(£100/month) | [28] |
| Mantor Ltd | £50 | - | £25 ______________(£100/month) | [29] |
| Red Ego | - | - | £25_______________(£100/month) | [30] |
| Trafalgar Contractor Solutions | - | - | £26.5_____________(£106/month) | [31] |
| PayMatters | - | £86.5 | £26.5_____________(£106/month) | [32] |
| Parasol | - | £119.5 | £27.50____________(£110/month) | [33] |
[edit] References
- http://www.hmrc.gov.uk/employment-status/details.htm
- http://www.hmrc.gov.uk/employment-status/msc-guidance-july07.pdf
- http://www.hmrc.gov.uk/employers/ebik/ebik1/dispensation.htm
- http://www.hm-treasury.gov.uk/consult_travel_expenses.htm
- http://www.hmrc.gov.uk/calcs/paye.htm
- http://www.hmrc.gov.uk/paye/exb-intro-dispensation.htm
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