Umbrella Companies End
Umbrella Companies are a great idea for UK contractors who are either caught by IR35 or who want to outsource their admin to someone else.
The advent of IR35, in 1999, brought out the need for them.
It’s reckoned that there are over 200,000 British-based contractors who use umbrella companies.
Very few contractors paid IR35 tax – as shown by Government figures in answer to questions in Parliament.
Limited Companies or Limited Partnerhips
Contractors either went the Limited Companies or Limited Partnerships route or operated through an umbrella company.
Umbrella companies are a device, where contractors, who are probably caught by IR35, can still offset some expenses, like travel and subsistence, against tax.
The contractor, in tax terms, ‘works for’ the Umbrella Company and the umbrella company pay his, or her, PAYE Tax after deducting expenses.
Disguised Contractors in Umbrella Companies
Of course, where the Government brought in IR35, in the first place, to catch what they saw as ‘disguised employees’, those in umbrella companies are, in effect, ‘disguised contractors’ – disguised for tax purposes.
If these contractors are really employees, why do they pay their ’employers’ a hefty fee each month, basically, just to pay them?
What other employees of companies have to do that?
Umbrella Companies and the Government
Umbrella company owners fondly imagined that the Government and HMRC liked umbrella companies.
There was good reason for them to believe this with the Conservative Governement, who had promised to ‘look at’ IR35 again, coming down heavily in favour of it and said that they intended to strengthen IR35.
An important reason for them deciding to keep IR35 was that they said that there was a danger that UK contractors would get out of their umbrella companies and go back to using personal service companies.
So, there was good reason for umbrella company owners to believe that HMRC and the Government liked them.
Umbrella Companies Pay HMRC
They argued that the Government, and HMRC, would rather deal with, and legislate for, a few hundred umbrella companies than hundreds of thousands of individual contractors.
Indeed, the umbrella companies send HMRC huge cheques every month. HMRC didn’t have to wait till after the year end to get their tax as they would for limited company contractors.
The future seemed to be secure for them.
Umbrella Companies and UK Contractors on the Outside
However, the Conservative Government, and its Chancellor, were greedy for the extra money that they could claw in from contractors.
They also didn’t see UK IT contractors and their umbrella companies as ‘one of us’ as they see international companies, hedge funds and high net worth individuals as ‘one of us’.
This has come as a great shock to IPSE (ex-PCG) who reckoned that the Tories would come to power as their saviours on IR35 and other issues in 2010.
They couldn’t have been more wrong.
Chancellor Osborne, and the Conservative government, look like they are going to keep their promise to strengthen IR35.
There has been a double whammy recently form the Conservatives.
First of all, they have stated that they intend to take away the ability for both umbrella company contractors and personal service company contractors to be able to offset travel and subsistence against tax.
There are other things that limited company contractors can claim against tax but this is the main claim against tax for umbrella company contractors.
The pay fees, often of over £100 a month, to their umbrella companies to do their admin and pay them – a service that other ’employees’ get from their employers for free.
The tax that they were able to save on such things as travel and subsistence often made it worthwhile.
Umbrella Companies No Longer Worthwhile
But it would it still be worthwhile for contractors to pay umbrella companies monthly when they can’t offset so much against tax for them?
Would they not be better just to pay the IR35 tax? Could they have their contracts, and way of working, changed to take them outside IR35 and use limited companies again?
Could they use Limited Partnerships?
That’s something that umbrella company contractors will be considering before April 2016.
This change could, potentially, have a huge impact on umbrella companies in the UK.
However it woudn’t be an existential threat to their industry.
They could limp along with lower numbers of contractors, i.e. those contractors who want someone to do all their admin for them.
Existential Threat to Umbrella Companies
However, what the Conservative Government are proposing, as seen by leaks to the Guardian and Daily Mail this week, would be an existential threat to them.
According to the leak, the Chancellor wants to get rid of intermediaries altogether.
By intermediaries he means umbrella companies and personal service companies.
He wants all contractors, who spend more than a month at a client company, to have to go on the company’s payroll.
There can’t be many contractors who normally spend less than a month at client companies, so this encompasses virtually all contractors. Indeed the minimum length of time for a contract is generally 3 months.
Umbrella Companies and Autumn Statement
If the Conservatives go ahead with this, and we’ll hear more in their Autumn Statement later this month, then this would be the end for umbrella companies in he UK.
Indeed, it would be an existential threat for contractors in the UK.
The Chancellor reckons that he would save £440m from this.
This is highly unlikely to be true.
it assumes that there will be the same amount of contractors in the future after they implement this change.
Companies Will Take on Fewer Contractors
However, many companies would not want to take short term contractors onto their books for short periods of time.
One of the main reasons that they take on contractors is that they can get rid of them so easily after a peak of work, e.g. a project, has ended.
Will they be able to get rid of them as easily if they were one the payroll and entitled, legally, to some benefits and worker protection?
The result of this is likely to be that companies hire fewer contractors, maybe even many fewer contractors.
This would result in a lot less tax coming in for HMRC and the Treasury.
This is a tax-making device that will turn out to be a tax-losing device.
Conservatives Attitude to Contractors
Whether they go ahead and implement this measure, or not, it appears clear what the Conservatives and the Chancellor think of UK contractors.
They see them all as tax avoiders and not just those in offshore umbrella companies.
They see those in personal servcie companies, and even those in umbrella companies, as tax avoiders too.
Indeed, they see contractors in the UK as all being in a tax avoiding profession.
Contractors will remember this.
If the Conservatives do go through with it, Umbrella Companies end may be nigh.
The full ramifications of what the Conservatives are proposing will not be seen till much later – when it may be far too late.
Limited Partnerships for Contractors
With Umbrella Companies and Personal Service Companies being attacked by the Chancellor, the new kid on the block could be Limited Partnerships.
Find out more by clicking on Limited Partnerships for Contractors where contractors can retain 85% of their income.