F.A.Q.

Why and how to choose an Umbrella Company

Let’s say that you are coming close to or have just secured a contract at a client site, either directly or through a recruitment agency.

What are my options?

What next? It’s likely your agency or client will require you to operate through an intermediary company – your own or an umbrella company.

Deciding between your own limited company or operating through an Umbrella company

This can be slightly nerve wracking if you are new to contracting. Firstly a general rule of thumb. If your contract earnings are going to be above £50K per annum and you are likely to be contracting for a while it is certainly worth considering “supplying yourself” through your own limited company rather than via an umbrella company. You’ll need a good accountant, for example Norla Accounting. Please refer to other sections on this site for more information.

What exactly does an umbrella company do?

An “Umbrella Company” or “UC” acts as the intermediary company, supplying you to your agency or client. The UC employs you and should take care of all aspects of administration for you, namely contracts, invoicing, credit control and payroll. In a nutshell the UC should have the systems to collect your timesheet information, raise invoices to your agency or client for your services, collect payment, attribute the right payments to your account and run a regular payroll, deducting the appropriate tax as governed by HMRC.

How do I chose between umbrella companies?

Because “tax is tax”, what’s the difference between UCs? If my earnings with one UC are no different to another UC, what criteria should I apply?

We suggest that you consider the following when weighing up which UC to chose:

Fees: average fees for a UK based Umbrella service are between £15 and £25 per week. Norla Services charge a £85 per month, which equates to just under £12 after tax.
Payment frequency: How long does the UC hang onto funds? Norla Services for example will pay within two working days of receipt of funds.
Compliance: Is the UC compliant? All payments should be subject to correctly applied PAYE, you should also be issued with an EU compliant employment contract.
Reputation: Factors to consider here are personal recommendations, length of time trading, how many contractors?, are all funds subject to PAYE?, does the company have at least one qualified accountant on site? etc.
Expenses: Deduction of legitimate expenses according to the rules is fine. Norla Services for example has an HMRC granted expenses dispensation. This means that although you must incur and retain receipts for all expenses claimed, you do not need to send in those receipts to us every week for example. This eases the administration burden for all concerned and is the purpose of such dispensations. To police this we run weekly expenses audits where you will be asked to send us your expenses for a particular week. This currently happens roughly every three to six months for each customer. Unfortunately we are sometimes forced “turn off” the dispensation (via our online portal) for those who fail to comply.
Quality of service: Aspects to consider here are, how often are there delays or mistakes in processing invoices and payments? Do you have access to an online portal 24X7 , and what visibility does this provide of invoices submitted and/or paid, timesheets and contracts online? What is communication like? Is there a team of account managers available to talk to?
IR35 compliance: this really is a red herring as all earnings are distributed via PAYE. However, HMRC will never “approve” any company, not least an umbrella company, so beware of a company claiming to be “HMRC approved” – it simply doesn’t happen.

Guide to IR35

IR35 was introduced as part of the Finance Act 1999. The purpose of the legislation was to eliminate the avoidance of tax and NI contributions by using an intermediary (usually the contractor’s own Personal Supply Company) in circumstances where the contractor would otherwise be considered an employee of the client. Prior to the introduction of the legislation, an individual could avoid being taxed as an employee by providing services through an intermediary and thereby reduce their personal tax liability and completely avoid payment of Class 1 NIC. The legislation commonly known as IR35 ensures that if the relationship between client and contractor would have been one of employment without the use of the intermediary, that tax and NI contributions are made on the same basis as an employee would pay.

IR35 Employment status – Employed or Self Employed

The Inland Revenue will use the following criteria to ascertain whether a contractor is considered an employee for tax and NIC purposes under the IR35 legislation. If you can prove you are working on a contract for services rather than a contract of service (employees) using these criteria, then it is likely that this contract is not subject to the IR35 legislation. However it is the reality of your overall working relationship with your client that will be considered, rather than simply what is written in the contract you hold with them. All of the following factors will be taken into consideration, although some will be given more weight than others in determining employment status. Unfortunately there is no single test that can be done to ascertain status under IR35.

Each contract will be considered on an individual basis, and it is therefore possible that workers may find that some of their contracts are that of employment or casual labour, and others point to self-employment. The tax/NI position needs to be considered for each individual contract undertaken by the worker.

Factors

Personal Service:

It is a necessary condition of a contract of service (i.e. employment) that a worker provides services personally. Under a contract for services, the worker is often entitled to a “right of substitution”, i.e. supplying another worker to perform the services under the contract. Such a clause will often require that the substitute is suitably qualified and/or experienced. The right of substitution is therefore a factor pointing towards self-employment. However, if the clause only provides the right to propose a substitute rather than actually sending them, with the final decision left up to the client, this is unlikely to be sufficient evidence of self-employment.

Mutuality of Obligation:

Certain factors are likely to be present in a contract for services that would not appear in a contract of service. An employee, for example, is not likely to be obliged to correct unsatisfactory work in their own time and at their own expense. An employee will probably have all equipment provided for them, and will be under the control of the client. They will also not have the right to undertake work for any other client at the same time, which a self-employed person operating on a business to business basis is entitled to.

Right of Control:

Employees are subject to a certain degree of control by the engager (this need not be exercised in practice). If the worker is told how to perform his duties, this is a strong indicator of employment. Under a contract for services, the client has obviously engaged a contractor to supply specific services, so the contractor necessarily has no control over what work is performed, simply how this is/should be carried out. If the client does not have or exercise a right to control how the worker performs the services that have been requested, this would point towards self-employment. A requirement to perform the services at the client’s site is not necessarily an indicator of employment, as this may be necessary in order for the worker to carry out the services (for example if the worker has been asked to assist with infrastructure that can only be accessed via the client’s site, possibly for security reasons).

Provision of own equipment:

A self-employed contractor will often provide whatever equipment and materials are required to complete the task, although in itself this is not a decisive factor. In some trades (e.g. carpentry), employees may provide their own equipment for a job. However, the outlay in purchasing this equipment is indicative of self-employment.

Financial Risk and Opportunity to Profit:

Individuals who risk their own money in undertaking work are likely to be considered self-employed. Expenditure on equipment, materials and training incurred by an individual with a real risk that the investment would not be recovered from income from future engagements is strongly indicative of self-employment, as no employee needs to undertake such a risk in order to obtain work. Similarly, an opportunity to profit from a task through good business management would indicate self-employment.

Length of Engagement:

By itself, this is unlikely to have much importance in determining the employment status of an individual, although the longer the contract with one particular client the more likely it is that the worker in question is employed. It is not uncommon for hirers to offer fixed-term contracts of employment or casual labour, so the fact that your contract has a fixed term is not necessarily indicative of self-employment.

Part and parcel of the organisation:

This can be a useful indicator. If a worker is seen by others in the organisation as an integral part of it, this would suggest employment, for example if they are involved in carrying out staff reviews, have a personalised security badge, their own desk or office and car parking space allocated.

Employee-type benefits:

A contract of service (employment) will carry with it certain benefits, some of which (for example paid annual leave) are statutory requirements. These can include membership of company health and pension schemes as well as being subject to disciplinary grievance procedures. A self-employed worker will not ordinarily have access to these benefits, and instead may be remunerated at a higher level than an employee performing similar services in order to compensate for the absence of those benefits.

Right to terminate contract:

Although usually difficult to negotiate out of a contract, due to the fact employers tend toward defined notice periods, a termination clause can again be examined by the Inland Revenue as an indicator of status. If termination is only due to breach, then this would suggest ‘self-employment’, but is not likely to be a major factor.

Personal Factors:

It can sometimes be useful to take into account a worker’s personal situation, which will have little of nothing to do with the terms of the particular contract in question. For example, if a worker works for a number of different clients throughout the year, and operates in a business-like manner towards obtaining new contracts (e.g. maintaining a website for their services or investing in office equipment and accommodation), this may be taken into account.

Mutual Intention:

In cases where other factors are not conclusive in ascertaining status, the intention of the parties may be taken into consideration. However, a stated intention of self-employment will not be considered if the other factors point to employment.

IR35 Links

For further information in regard to IR35 please see below: