Reply to: Ltd vs Umbrella & IR35

[malvolio]

A company director or self employed person is obliged to take care of their own self assessment tax return and rightly so.

But someone working for an employer (eg umbrella) with no other income is not required to do a self assessment tax return. The PAYE system relies on the employer deducting the correct amount of tax. If the employer makes a mistake and pays their employees a tax free allowance that they weren't entitled to then how is the employee supposed to know this has happened? The employee makes a claim in good faith and the employer has been given a dispensation from HMRC on the understanding that they will audit their employee's claims to make sure they are valid.

Yes, tricky, isn't it... Doesn't make it right though, does it. Nor, sadly, does it abrogate you from your responsibility to pay the correct taxes. "Good faith" is not a concept that works with taxation.

The real issue is a whole industry built up tolerating a number of their peers not applying the rules correctly becuase that would cost them business. The good guys do it correctly, but the good guys don't advertise on the basis of maximising your income.

[Wanderer]

However, ulitmately it is your personal resposnsibility to pay the correct tax (that's why it's called a Self Assessment form) so they should have corrected their returns to HMRC and advised the (ex-)employee to declare the additional income.

A company director or self employed person is obliged to take care of their own self assessment tax return and rightly so.

But someone working for an employer (eg umbrella) with no other income is not required to do a self assessment tax return. The PAYE system relies on the employer deducting the correct amount of tax. If the employer makes a mistake and pays their employees a tax free allowance that they weren't entitled to then how is the employee supposed to know this has happened? The employee makes a claim in good faith and the employer has been given a dispensation from HMRC on the understanding that they will audit their employee's claims to make sure they are valid.

[malvolio]

The intention does not necessarily equate to the ultimate reality. If the umbrella allowed the expenses and then it turned out that they should not have done since the reality was that the worker had the single gig, they, as the emplyer, should have corrected the tax and treated the expenses as a BIK. However, ulitmately it is your personal resposnsibility to pay the correct tax (that's why it's called a Self Assessment form) so they should have corrected their returns to HMRC and advised the (ex-)employee to declare the additional income.

By not doing so they are complicit in tax evasion. Wonder if they realise that?

[Wanderer]

Join the PCG. Stop worrying.

Agree with that! Lack of substitution is not the end of the world, there are examples of workers with no RoS being outside IR35 in HMRC's guidance so it's not the kiss of death. The threat of a tax investigation hanging over your head for the next 6 years is difficult for some people to accept though so it's each to their own.

They're wrong then, and breaking the law. One workplace doesn't represent a temporary workplace for an umbrella user, it is a permanent one. When you get another contract elsewhere with the same umbrella, then you can say it was temporary.

I know people who have worked a single engagement though an umbrella and got away with it. All the umbrella company asked them to do was to state at the outset that their intention was to work multiple contracts and in good faith, employees stated that that's what they intended to do so the claim was allowed. In the actual event, it didn't turn out that way but in the same way as a 3 month contract may be extended again and again to put an employee over the 24 month rule, it's the intention at the outset of the engagement which counts, according to the umbrella.

I know that doesn't comply with the letter of the law but this practice is widespread and it's another one of the 50 shades of grey in our tax system.

But I also have to ask: Who made the mistake here? The employee or the employer? If HMRC do a PAYE compliance check, then do they talk to the employees or the employer? Would an employee have to pay for a mistake their employer made? Even then, the employee would have left by the time HMRC investigate so the umbrella have no comeback against them to recover the tax owed. Why would HMRC chase a few hundred ex-employees when they are scattered to the 4 winds and they will all just argue the point anyway. It's easier for HMRC to get the money off the employer and it teaches the employer a lesson not to make that mistake again.

If a contractor has entered into an arrangement with the umbrella in good faith and intending to work for multiple clients, then it's up to the employer to take action if they see and reason to do so. If the employer chooses not to take any action and the employee is not aware that they have done something wrong (and how could and employee understand the incredibly complex tax rules) then the employee could just say they acted in good faith and the enforcement of the rules was up to the employer. Worst case scenario they would have to pay the tax but no penalty.

Personally I went Umbrella for the first 6 months just because I had enough on my plate to deal with learning the contracting ways without failing at my finances as well. Spent 6 months getting used to the accounting and then went LTD.

Did you work for multiple clients during that time then? If not, did you claim for travel and subsistence?

[speling bee]

I have never been convinced by a brolly even if inside IR35. There have been a couple of threads recently where end clients have not paid up and the contractual route for debt collection has been for the employee to chase / take legal action against the brolly, who does the same to the agent who does the same with the client. Too many parties.

[malvolio]

Seen as though it would be very difficult to arrange IR35 insurance with the contract,

No it's not. Join the PCG. Stop worrying.

[Wanderer]

I've asked the agency for a copy of the contract to get it checked by myself and a review service like QDOS but they've said that contracts are only sent out once I've given them details of a Ltd co/umbrella co and am ready to sign it.

Funny how they do that, isn't it. "Oh our contracts are 100% outside IR35!". Can I have a look at a blank one? "No".

The lack of subst. has shifted the contract into the 'borderline' category and the tests I've done online reflect this.

The lack of substitution would be a bit of a problem all right. If you get it professionally reviewed then the review will help you negotiate the points in the contract that are important. I've seen agencies wait until the 11th hour before presenting the contract so they can limit the amount of time that the contractor has to negotiate...

You may need to ask admin to enable your PM function

Though it's not too difficult to work out where Clare works @ and make contact though other means.

[Clare@InTouch]

Thanks for your replies.

Yes I'm aware of the 'single contract claiming expenses with umbrella rule' but won't incur significant expenses apart from short distance commuting so it isn't a problem if I go with an umbrella.

Clare - can I send you a PM? Can't seem to find the option though haha

You may need to ask admin to enable your PM function

[northernladuk]

Northernlad - yes I have. Much more than that. I've also considered the subst. point and came to the conclusion (see my gut instinct point above) that it's definitely inside IR35 and not outside as the agency claims. The online tests say its borderline but the fact the client expects personal service suggests it isn't borderline and a pretty easy case for Hector to win.

Seen as though it would be very difficult to arrange IR35 insurance with the contract, the only matter left to consider is whether I want to pay an umbrella co to deduct PAYE, NI and their fee without worrying about any company and tax affairs or whether I want to set up a Ltd co and benefit from the 5% deduction in the IR35 deemed salary calculation.

Ok well that is up to you. Personally I went Umbrella for the first 6 months just because I had enough on my plate to deal with learning the contracting ways without failing at my finances as well. Spent 6 months getting used to the accounting and then went LTD. Many people say it wasn't the most efficient way to go but 6 months will be nothing in the years of contracting to come.

[agan]

Northernlad - yes I have. Much more than that. I've also considered the subst. point and came to the conclusion (see my gut instinct point above) that it's definitely inside IR35 and not outside as the agency claims. The online tests say its borderline but the fact the client expects personal service suggests it isn't borderline and a pretty easy case for Hector to win.

Seen as though it would be very difficult to arrange IR35 insurance with the contract, the only matter left to consider is whether I want to pay an umbrella co to deduct PAYE, NI and their fee without worrying about any company and tax affairs or whether I want to set up a Ltd co and benefit from the 5% deduction in the IR35 deemed salary calculation.

[northernladuk]

Have you read the guides and the stickies on this site first so you can start to form your own opinion first?

For example?

http://forums.contractoruk.com/umbre...composite.html

BTW

The lack of subst. has shifted the contract into the 'borderline' category and the tests I've done online reflect this.

If you get QDOS to review your contract (which I hope you are doing) they will return this is as a flat fail, not borderline.

[malvolio]

Has something changed here? The Umbrella I used to work for did not have this policy. Providing that national minimum wage rates were met, one contract would suffice...

They're wrong then, and breaking the law. One workplace doesn't represent a temporary workplace for an umbrella user, it is a permanent one (the dual joys of a contractor paying someone to manage their money while being treated as an employee). When you get another contract elsewhere with the same umbrella, then you can say it was temporary.

[Nixon Williams]

Has something changed here? The Umbrella I used to work for did not have this policy. Providing that national minimum wage rates were met, one contract would suffice...

It is nothing to do with the policy of the umbrella company.

Travel expenses may only be claimed for travel to a temporary location, if this is your only location whilst with the umbrella company, or indeed with a limited company, then the location cannot be temporary, it is permanent. As such Travel, subsistence etc should not be claimed.

Alan

[agan]

Thanks for your replies.

Yes I'm aware of the 'single contract claiming expenses with umbrella rule' but won't incur significant expenses apart from short distance commuting so it isn't a problem if I go with an umbrella.

Clare - can I send you a PM? Can't seem to find the option though haha

[Sally@InTouch]

Note: if you're with a brolly for only one contract, you cannot claim T&S expenses for that contract.

Has something changed here? The Umbrella I used to work for did not have this policy. Providing that national minimum wage rates were met, one contract would suffice...