UK Contractor Umbrella Companies
Should IT contractors be in UK Contractor Umbrella Companies?
UK Contractors normally have three options. They are :-
1. Onshore Umbrella Companies
There is also self-employment but this is seldom used by UK Contractors as there are few tax advantages and they are, also, not under the protection of limited liability.
Onshore Umbrella Companies and UK Contractors
The reason that contractor use these onshore umbrella companies is twofold:-
1. The Contractor is inside the IR35 Tax and, without an umbrella, would have to pay their full tax without any deductions for expenses.
2. The contractor wants to outsource his admin, and concentrate on contracting, without the hassle of doing his or her books and VAT returns.
Onshore umbrellas do all the work for UK contractors. All the contractor has to do is to provide a timesheet with his, or her hours.
1. Raises an invoice to the agency or client
2. Deducts expense claims from the tax payable
3. Pay the tax to the taxman
4. Pays the contractor.
UK Contractors are, effectively, employees of the brolly. They are, if you like, ‘disguised contractors, i.e. contractors disguised as employees for tax purposes.
They pay, unlike company employees, a monthly fee to the companies.
Therefore, there is no need to produce any end-of-year accounts.
All the contractor has to do is do the work, and produce the timesheet and expense receipts, and they do the rest.
IR35 Investigations and UK Contractors
The contractor doesn’t have the worry about whether they are inside or outside IR35.
They do not have to stay away at night worrying about any possible IR35 investigation by HMRC which could result in years of conflict with HMRC and possible tens of thousands of pounds in back tax payments.
They can sleep safely at night. However, their bank accounts are not so healthy as they would be if they used one of the other three options stated above.
Limited Companies and Offshore Umbrella Companies
They reckon that UK Contractors, using Limited Companies or Personal Service Companies, pay £10,000 a year less in tax. That can mount up over a number of years – especially if they invest it wisely.
Umbrella Company contractors are also likely to be, perhaps, £20,000 a year worse off than those using offshore ones. UK Contractors can get returns on their income of 84% to 90% if using one of those.
This is done by operators keeping the money that UK contractors earn but giving them loans in place of it. Loans are not taxabale under UK law.
If they made loans taxable it would destroy the UK banking and venture capital sector which earns a fortune worldwide for the UK Government.
Theoretically, the money is taxable when the money comes back onshore – but it never does. The contractor never pays the loans back and they lapse on his or her death. Loans die wih a person. You don’t pass them on to inheritors.
Pundits did think that the Government, and HMRC, were in favour of UK contractor umbrella companies. Indeed, when the Tories were elected on a promise of looking at IR35 again, they decided to keep it.
The main reason was the fear that UK contractors would simply abandon their brollies, if they abolished IR35, and set up Limited Companies again.
There are around 200,000 UK contractors using umbrellas. As they pay around £10,000 a year more in tax than limited company contractors, this would have cost the Treasury £2 billion a year.
It was thought that HMRC liked the huge tax cheques that they got from the brollies every month, extracted from their ‘disguised contractors’, when they would have had to get in dribs in drabs, otherwise, and have to wait till after the contractors’ limited companies’ year end to get it.
It was thought that HMRC, and the Conservative Government, would tolerate the expenses being claimed by umbrella co contractors as they would prefer to deal with a few hundred brollies rather than hundreds of thousands of UK Contractors.
However, HMRC and the Government are greedy for UK contractors’ money and they have now decided to stop umbrella company contractors (as well as contractors using personal service companies) from claiming travel and subsistence expenses against tax.
This came into effect in April 2016.
This obviates one of the main reasons for using them and so umbrella company contractors have to assess where they should continue to use UK contractor umbrella companies or whether they should look at the other options, e.g. limited companies and offshore companies.