Everything you ever wanted to know about umbrella companies but were afraid to ask...
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    Umbrella Queen

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    Default Everything you ever wanted to know about umbrella companies but were afraid to ask...

    There have been so many questions by new contractors about umbrella companies and the way that they work that I thought I would put together a help guide. Hopefully it will answer most of the questions that crop up:

    All umbrella companies will process your payments through PAYE (Pay As You Earn) as the assumption is always made that you will be working inside IR35. As such you will be liable for income tax and both employee’s and employer’s national insurance. More information on income tax can be found here: http://www.hmrc.gov.uk/rates/it.htm and here: http://www.hmrc.gov.uk/rates/nic.htm for national insurance.

    You will be advised that you can claim expenses which will either be charged direct to your client or will be processed as a tax benefit. You can only claim expenses which are approved by the Inland Revenue.
    All of the above means that, it does not matter which umbrella company you use, your net earnings should be the same provided that all Inland Revenue regulations have been followed. The only difference should be the fees that your umbrella company charges.

    Most umbrella companies will mention a ‘dispensation’ and the term is sometimes used in advertising. A dispensation will not tell you which expenses can be claimed it is merely an accounting tool for your umbrella company. Under normal accounting practise all expenses that a company processes have to be recorded on a P11D form which is sent to the Inland Revenue; an umbrella company’s dispensation means that this form will not be required for those expenses that they have listed. The dispensation does not relieve the contractor of any responsibility at all regarding the provision of receipts – they will be required if you are the subject of an Inland Revenue investigation. Nor does it mean that you can legitimately claim more expenses through one umbrella company than another, they have to be Inland Revenue approved and must be supported by receipts. To quote the Inland Revenue:

    "I can confirm that contractors cannot automatically claim £21 per day (or any other amount) for each day they are at work. It is also worth saying the Inland Revenue would not give general approval of a company's expenses policy. A dispensation would never cover large amounts of unsupported expenditure"

    Most umbrella companies will also have a calculator on their websites to give you an illustration of your earnings. You may find that they will return different results. If a calculator does not ask you for details of your expenses it may assume a figure based on some sort of average, therefore the figure you are quoted will only be accurate if the figure assumed is exactly the same as the expenses that you incur. Therefore, you should always check that you are comparing like with like and, remember, the calculators are for illustration purposes only and will always give an estimate rather than a quote.

    Also, bear in mind that you are the customer of the umbrella company and as such you should be able to leave at any time without penalty. During your research you should check whether there are any ‘hidden costs’ and you should obtain confirmation in writing.

    Lastly, if the scheme being offered seems too good to be true then it very probably is and you should contact the Inland Revenue directly if you are unsure about any of the information that you are being provided with

  2. #2

    More time posting than coding

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    I was afraid to ask so I've set up a limited company...
    The rest is silence...

  3. #3

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    Best put this in Accounting/Legal and ask the forum admin to make it a sticky.

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    And it's also necessary to add: If you only do one placement through any one umbrella, there is a (noticable) risk that the revenue might consider you are *not* a 'worker temporarily working at a remote site' at all and disallow all expenses.

    tim

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    Should post faster


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    Quote Originally Posted by tim123
    And it's also necessary to add: If you only do one placement through any one umbrella, there is a (noticable) risk that the revenue might consider you are *not* a 'worker temporarily working at a remote site' at all and disallow all expenses.

    tim
    Tim

    Most people say on this board say 'if you are only going to contract for a short time then an umbrella company is the favoured option’ but if you can not reclaim your travel and subsistence (due to the one placement) then you are as well to go on the agency payroll and save on the umbrella companies fees...NO?

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    Quote Originally Posted by Robot
    Tim

    Most people say on this board say 'if you are only going to contract for a short time then an umbrella company is the favoured option’ but if you can not reclaim your travel and subsistence (due to the one placement) then you are as well to go on the agency payroll and save on the umbrella companies fees...NO?
    It's not really for me to say what is best.

    I was just pointing out that this is a risk, and that it's new risk - one that wasn't considered before.

    tim

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    Default Expenses

    Quote Originally Posted by LisaContractorUmbrella
    You can only claim expenses which are approved by the Inland Revenue.
    I think what you mean here is that the umbrella company won't let you claim expenses in excess of the P11D dispensation limits because it would cause them more work than they want to do.

    You could, of course, quite legitimately incur expenses in excess of the P11D dispensation limits and claim the excess on your own Tax Return or through your coding.

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    ASB
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    Quote Originally Posted by Bradley
    You could, of course, quite legitimately incur expenses in excess of the P11D dispensation limits and claim the excess on your own Tax Return or through your coding.
    Yes, but it's a pain. My employer has a limit on hotels not booked through their travel agents. If I claim this on my tax return I only save the tax rather than the entire amount. [Ok, in terms of an umbrella this is probably irrelevant since it's the same pot, but as an actual employee my expenses are in addition]

    Also, it appears to me that PIE's can ONLY be claimed from an employer.

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    Default Expenses

    Quote Originally Posted by ASB
    Yes, but it's a pain. My employer has a limit on hotels not booked through their travel agents. If I claim this on my tax return I only save the tax rather than the entire amount. [Ok, in terms of an umbrella this is probably irrelevant since it's the same pot, but as an actual employee my expenses are in addition]

    Also, it appears to me that PIE's can ONLY be claimed from an employer.
    I think the most sensible and time efficient thing to do would be to alter the notice of coding instead of putting in a Tax Return. The expenses incurred over what was reimbursed could be an estimate.

    You're quite right what you say about PIEs but I can't see HMRC refusing the individual expenses comprising the PIE allowance evidence of which you will need to have gathered anyway.

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    Is it worth adding that when you work through an umbrella you are, as a legal obligation (so I'm told), obliged to pay a percentage of your income into a holiday fund. You can then claim holiday pay for any days off and any money remaining in the pot in December will be paid back in that month's pay packet.

    I don't know how many umbrellas enforce this rule, but mine does and as I say they told me it's a legal requirement.

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