Umbrella companies: HMRC issues guidance
Umbrellas - so hot right now. Not just because the weather is still as unpredictable as a child whose swallowed a cup of sugar, but because of our old pal the IR35 tax rules. Introduced in 2000 and updated since then, most recently in April of this year, they have forced the creation of the “umbrella company” industry.
The new IR35 reforms forced umbrella companies to be set up en masse to better manage and reduce tax costs. They do this by being set up as a standard limited company who can then act as an ‘employer” on behalf of its contractor employees and this method can help to offset and reduce IR35 liabilities.
But already these methods have been hit with controversy as some umbrella companies are being set up that illegally deprive the UK of tax revenues. A recent BBC investigation found widespread fraud of umbrella companies being set up abroad and the findings have urged HMRC to advise people who wish to use an umbrella scheme to understand how they work properly and they have issued updated guidance on how to do so. This guidance offers clarity on how the supply chain works and what a contractor should accept from an umbrella company.
So how do you make sure you’re within the proper IR35 guidelines when dealing with an umbrella company? First things first you should look for three key things:
- Is the umbrella company accredited by FSCA, APSCo or Professional Pass Force? These companies carry out audits on umbrella companies that say they abide by the proper codes and also work closely with government departments to ensure compliance.
- Has the umbrella company provided a clear illustration showing the umbrella rate, its costs and your gross and net pay?
- Has your agency dealt with the umbrella company before and can vouch for it?
Now let’s look at the extensive guidance that was updated by HMRC:
- The rate paid by an agency to the umbrella company known as an “assignment rate” or “limited company rate” is not a contractor's personal rate. Compliant umbrella companies have always made this clear during an illustration call and/or a written illustration.
- The assignment rate should include:
- administration costs/margin
- employer National Insurance contributions
- employer workplace pension contributions
- holiday pay
- apprenticeship levy
- The rate paid to the umbrella company by the agency will need to cover the employer costs. Agencies, when agreeing rates with their own clients, will factor in these costs. Agencies should be clear with contractors about the umbrella rates and what they cover. This information is nowadays set out in a key information document provided to the contractor before the assignment starts.
- The umbrella company will pay employer contributions from the assignment rate and not deduct the contributions from a contractor’s gross pay.
- The reconciliation statement to make explicit that where an umbrella company pays the contractor the National Minimum Wage plus another element, this should all be taxable. HMRC highlights that if any of this is stated as ‘non-taxable’, it may be an indicator of an avoidance scheme.
- The reconciliation statement should reiterate that the employer National Insurance Contribution liability is deducted from the umbrella’s rate, not the contractor’s gross pay.
- Holiday pay should be paid out. If the umbrella retains any holiday pay it should be paid out when a contractor leaves.
Got all that? Good! Not tricky at all is it *gulp*. You could bypass all of the hullabaloo altogether and use BrightPay payroll software, which offers full IR35 functionality for contractors who fall inside IR35 without the need of going via an umbrella company at all. Click here to watch a demo and see if this could save you a lot of hassle.
Written by Aoibheann Byrne