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Umbrella co benefits

Umbrella co benefits

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A friend (industry accountant) who was made redundant after working for a long time with one company, has been offered a 3-month contract starting on Monday. However, she thought she would be an agency temp but the agency has now turned round and asked her for her umbrella co or ltd co details! They have also passed her details to an umbrella co they have an agreement with.

Does this sound normal nowadays? I think that as she isn't planning to contract long-term, an umbrella co. may be the way to go. Also, how does this sit with IR35?

All help, advice and any recommendations of good, reputable umbrella companies (if appropriate) gratefully received.

Thanks in advance.

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By girlofwight
07th Sep 2012 22:09

Umbrella companies are subject to the MSC (Managed Service Company) rules which effectively overide IR35 and impose full PAYE / payroll obligations.

For 3 months or so an umbrella is probably cost effective. Longer than that, and even with a IR35 fail, a PSC is likely to be better - umbrella management fees tend to be horribly expensive.

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By Barry Mellor
07th Sep 2012 13:41

Most Umbrella companies have a flat flee which is reasonable for the administration work they are providing.

Umbrella Companies are not caught by MSC the HMRC Guide to the legislation states "In umbrella companies workers are treated as employees of the umbrella company and all payments to workers as employment income which is paid in the form of salary and allowable expenses. It follows therefore that what the worker has received from the umbrella company is the same as they would have received from any other company through which the worker operated and which treated all payments as employment income. Consequently the third condition is not met and the umbrella company does not meet the definition of a Managed Service Company.  

Umbrella Companies are not caught by IR35 as all salary is subject to tax and national insurance

Certainly better than going Limited if for a short period.


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By girlofwight
07th Sep 2012 14:28

Splitting hairs
Surely whether or not a umbrella is in MSC rules or not us splitting hairs - In practical terms the effect of IR35 caught PSC v MSC v Umbrella are the same for the worker.

I'ld agree though, stay clear of a PSC - ie your own company - for a short contract.

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Kye Burchmore profile image
By Kye Burchmore
07th Sep 2012 14:44

Umbrella and MSC

Sounds pretty normal for the agency to insist on you going through a different ltd company.

I agree that an umbrella operating PAYE correctly would not be caught by the MSC rules. There are however a number of umbrella companies that also offer a Personal Service Company Solution in addtional to the standard umbrella services.

The PSC model is certainly open to challenge under the MSC rules (and a number of companies are in fact currently being challenged by HMRC). Although each umbrella offering a PSC solution will give some vague reason why their set up is different and not caught, I am yet to be convinced and think those umbrella's are risky companies to contract with even if you only use their PAYE service rather than opting for the PSC model.

To answer the original question, the umbrella option would probably be the least hassle but it may not be the cheapest either (largely because of the employer's national insurance the umbrella has to account for).    



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By girlofwight
07th Sep 2012 22:32

Sorry to bang on
But I think it's misleading to say Umbrellas are not caught by the MSC rules - its like saying speed limits don't apply to you as you never exceed them.

The MSC rules, put simply, make sure that everything that goes to the contractor is payrolled.

A umbrella, in it's traditional sense, payrolls the contractors monies to start with.

It's the same result.

Similarly, if a client with a PSC comes to me with a clear IR35 fail contract we will payroll 95% of net revenues - you could say then that "IR35 doesn't apply as a salary has been paid equal to 95% of net revenue"; however clearly that's a nonsense play in words.

I really despair of the unregulated advice given to contractors which never seems to me to be unbiased: the OP asked "how does this sit with IR35" in the context of umbrella companies: the straight and honest answer is because Umbrellas payroll everything IR35 doesnt apply.

As I say for a a three month contract, who cares, but on longer term contracts it's important to be clear that unbrellas/MSCs are all of a genre that can never offer a outside IR35 position and the attendant tax savings.

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