Umbrella Companies in the UK
Self employed staff and contractors who are just starting out all alone are instantly faced with the problem of what type of business structure they should adopt. The two main choices these days are Limited Companies or Umbrella Firms. The 1st option, whereby a freelancer, agency contractor or computer expert selects to set up an one person limited company is the established route to organising a contracting business, whereas the second option, to line up UK Umbrella Companies, is a rather more recent approach and something that more and more contractors have been doing.
Nonetheless another recent development that also must be considered when making the choice is IR35 legislation. On paper, it is crucial to make it clear that the choice of umbrella company or limited company doesn’t, and shouldn’t, influence in any fashion the IR35 classification of a contract or the modus operandi of any arrangements for working. In a similar fashion, whichever route is chosen wouldn’t be influential upon a HMRC decision or review to decide whether or not the contract is to fall within IR35 regulations. Nonetheless, ever since the 2007 budget introduced Managed Service Legislation the only real umbrella company option open to contractors has been to utilize a PAYE umbrella company which still means that all earnings will be paid as if the contractor is caught under IR35. This point is critical as the monetary and financial implications of being caught within IR35 are massive. If you’d like to find out just how huge they’re you can find out by testing one of the many IR35 calculators found on contractor websites.
If a contractor goes down a company route they must run their limited company themselves as opposed to delegating important decisions, control and administration to 3rd party setups. If a contractor operates outside of IR35 they are more likely to utilize a limited company vehicle as it works out better financially. On the other hand if a contractor operates within IR35 neither option will have any effect on the quantity of net pay but there are probably going to be heftier costs of administration linked with the running of an umbrella company as all responsibilities will be delegated to an unrelated party.
Under an umbrella company solution a contractor has none of the responsibilities routinely connected with the managing of a limited company and wouldn’t be a director. Instead, the supplier of the umbrella company will manage all taxation matters and accountancy and they’ll also handle any associated administration. This works just by the contractor filling out one timesheet and passing it on to their umbrella company supplier who will then be answerable for invoicing any agents. The agent will then make payment to the contractors umbrella company and they may in turn make a payment to their contractor.
For the contractor the umbrella company offers the advantages of taking away the trouble and time connected with limited firms. They get the money in their accounts at the end of the job as documents breaking down how it became their. They don’t have any need to fill out payroll forms, VAT returns, company accounts and need never bother with spreadsheets.
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