About Us
What is an Umbrella Company?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.
Umbrella companies have become more prevalent since the British government introduced so-called "IR35" legislation that creates tests 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.
In December 2006, the UK Treasury introduced the above-mentioned draft legislation "Tackling Managed Service Companies 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. HMRC frequently asked questions..
The 2008 HM Treasury Pre Budget Report reported on the consultation on the use of travel expenses in conjunction with being employed via Umbrella Companies. 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 of the consultation in December 2008.
All Umbrella Companies use the same PAYE calculations 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.
