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Tax and finance can seem like a complicated field and so one of the main reasons that some contractors choose to work through an umbrella company is to minimise the amount of financial admin that they are responsible for. However, using an umbrella company does not relieve you of ultimate responsibility for your finances, so it is important to choose a company which operates within the law and for your benefit. Some of the claims that less than scrupulous companies make follow common themes such as:
Some umbrella companies will promise you a take home wage that equals 85% of your net pay. While this might sound like a great rate, the reality is that you would be leaving yourself open to substantial fines and claims for tax and interest. These companies will often urge you to claim, or claim on your behalf, £36 per day as a meal allowance, which could land you in trouble if you are not actually using this allowance in the course of your assignment.
Most of these companies have a clause in their small print to the effect that although the umbrella company will pay expenses without receipts, you will need them if HMRC were to investigate you. Therefore if you are unable to show proof that you have spent this money you will be fined, and may have to repay any tax owed with interest. A reputable umbrella company will never encourage you to claim expenses that you haven’t incurred and most will check all your expenses claims to ensure that you stay on the right side of HMRC.
No organisation can offer a guarantee that you will not be the subject of an investigation by HMRC, not least because, however much work they do on your behalf, the ultimate responsibility for your tax situation lies with you. If you have underpaid tax, you will be pursued and even if you can show that you received bad tax advice, you will still be liable for any outstanding debts and could be subject to penalties and further interest added to your bill.
Simply put, there is no such thing as an HMRC approved umbrella company. HMRC does grant special dispensation to some companies, but this is just to allow them to process claims without seeing every receipt. Most large umbrella companies have a dispensation from HMRC, but this in no way protects their users from investigation, prosecution or fines being levied. All the dispensation means is that an umbrella company does not need to see proof of expenses they process if they are under a certain amount. However, this does not mean that the individual isn’t required to keep proof, or that they can claim that amount in expenses if they have not incurred costs that high.
IR35 might be a hot topic amongst contractors at the moment, but it simply doesn’t apply to contractors who are working through umbrella companies, so it is irrelevant. If a company claims that they are IR35 compliant, it’s worth considering what other tricks they are using to make themselves appear to be legitimate.
New legislation means that an umbrella company effectively acts as an employer of the contractors on their books. This means that they need to sign a contract of employment and that the umbrella company are responsible for paying a range of statutory benefits including SSP, SMP, SAP and SPP. Some companies make separate deductions from your income to cover these benefits which means they are failing to fulfil their legal responsibilities. Likewise, companies which deduct money to fulfil their liabilities under the Agency Worker Regulations should be avoided at all costs.
Some umbrella companies have arrangements with agencies whereby they pay a referral fee for any clients which they recommend. This is standard in some sectors and isn’t a problem generally, but some agencies will favour umbrella companies which pay them higher referral fees over ones which might offer a better service.
Some agencies may have exclusive arrangements with a particular umbrella company, which means they will refer all their clients to the one organisation and the contractor does not have a choice in which company they use. This can be a damaging practice as it means that contractors are not free to choose the company that suits their needs and they can be tied to a company which is more interested in making money than providing a much-needed service to their clients.
If you’re looking to take your first step into the world of self-employment, but would like the flexibility of both an umbrella and limited solution, you’ve come to the right place. At Nixon Williams, as part of our Platinum and Professional packages, you can seamlessly switch between umbrella and limited, depending on your assignment. To find out more, just fill in the form below and a member of the team will be in touch.