Using Umbrella Companies Unnecessarily – Are You?

Using Umbrella Companies Unnecessarily

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Many contractors are using umbrella companies unnecessarily.

Of course, by the same token, some contractors are using personal service companies when they are inside IR35. Those contractors should really be in an umbrella company.

If HMRC catch them they could be in serious trouble.

Umbrella Company Contractors Paying More Tax

However, for this article, lets concentrate on those contractors  who are using umbrella companies unnecessarily.

There are over 200,000 contractors using umbrella companies in the UK.

They pay around £10,000 a year, average, in tax and national insurance contributions more than a personal service company contractor.

Types of Contractor Using Umbrella Companies

There are several types of contractors who use umbrella companies:-

1. Contractors caught by IR35 who want to be able to claim some expenses that they couldn’t do if they were paying IR35 tax.
2. Contractors who are not sure whether they are inside of IR35 or not. However, they don’t want to take the chance of being investigated for IR35. That investigation could take years and could end in them paying tens of thousands of pounds in back tax. They would rather sleep soundly in their beds at night.
3. Contractors who are probably outside IR35 but who don’t want the hassle of doing their own admin. They are prepared to pay more so that they can just concentrate on their contracting careers.
4. Those, especially new contractors, who know no better but who were shoe-horned into umbrella companies by unscrupulous agencies who get a backhander from the brolly for doing so. This is against the 2010 Bribery Act but it is widespread in the industry.

Umbrella Company Contractors to Lose More Money

As stated, umbrella company contractors are already paying an average of £10,000 a year more than personal service company contractors.

This rose to as much as £15,000 in April 2016 after the Chancellor took away the right of umbrella companies to offset travel and subsistence expenses against tax for those caught by IR35.

That should be the vast majority of them.

Contractors Dumping Their Umbrella Companies

If they are not caught by IR35 tax they could save £15,000 a year by dumping the umbrella company and using a personal service company.

Those contractors using umbrella companies who caught by IR35 have two options:

1.  Remain in their umbrella companies and lose more in tax from April.
2. Change their contracts and working practices to get themselves outside of IR35 and use a personal service company.

For further information on doing that see IR35 Factors.

Contractors Considering Their Tax Options

Many contractors, who heard Chancellor George Osborne’s Autumn Statement will consider their options after April next year.

Others, who don’t take that much interest on what is going on in the outside world, will not know what is to happen at the moment.

However, their umbrella companies will have to tell them prior to April that they will lose their ability to offset travel and subsistence expenses against tax.

When that happens, many of the the UK’s 200,000 umbrella company contractors will reassess whether they are best in an umbrella company or whether they would be better off using Personal Service Companies.

Already many contractors are using umbrella companies unnecessarily. There could be a lot fewer after April.