Umbrellas Are Not All Leak Proof
26 Jun 2008
Although you might have thought that service providers had learnt by now that compliance is not an optional extra, there are still a surprising number of umbrella companies that are trying to bend the rules.
Since the demise of managed service companies, most contractors now work either through limited companies or through umbrella schemes. But had you considered that recruitment agencies now have a vested interest in ensuring that the contractors they supply to their clients are working under a fully compliant HMRC-approved regime?
Although genuine umbrella companies have been exempted from the recent MSC legislation, this does not mean that they are exempt from other (and in some cases, even more draconian) legislation such as the Money Laundering Regulations etc. Further more, umbrella companies who do not conduct themselves in accordance with HMRC’s strict understanding of how an umbrella should operate may find themselves in hot water before too long. And if an umbrella is not an umbrella as HMRC see it, then it is probably an MSP and those contractors working through it (and their agencies) may be at risk.
It is a given that all umbrella companies will process a timesheet on a contractor’s behalf and pay them on agreed dates – otherwise why would they remain in business?
However, scratch the surface and look beyond the wild claims of high ‘after tax’ retentions from some unscrupulous umbrellas, and contractors might be surprised to discover quite a different story. There should, in fact, be very little variation from one umbrella to another – and if there is, then you should be suspicious.
All UK umbrella companies use exactly the same calculation to work out how much to pay their contractors. Therefore the only variation in the net sum paid will be due to the fees umbrella companies charge AND the level of expenses processed. It is simply not within an umbrella’s power to decide what level of expense is acceptable - all UK umbrellas have to follow the same HMRC rules and regulations when processing expense claims.
Some umbrella companies operate under what is known as an HMRC ‘Expense Dispensation’. Unfortunately, this can be misleading, as there is no such thing as a universally applicable dispensation. Dispensations are granted at the discretion of local HMRC tax inspectors and these can lead to significant regional variations.
If HMRC deems that the dispensation under which an umbrella company operates has been obtained based on false or misleading information, then it reserves the right to revoke its dispensation and potentially disallow many of the ‘round sum’ expense claims a contractor may have already made. This could lead to an unexpected tax bill.
With HMRC paying much closer scrutiny to the umbrella market and in particular, at ways of increasing its tax take, contractors should take great care when choosing their umbrellas.
As all fully compliant umbrella companies should be operating on a level playing field, a contractor’s choice should be based on service levels and knowledge that the umbrella company is fully compliant, reliable, and above all solvent! Simply comparing levels of take-home pay is no longer acceptable.
If contractors choose umbrella companies because they are offering greater take home pay and more ‘generous’ expense allowances than anyone else, then caveat emptor. After its success in obliterating managed service companies, the Revenue is now breathing heavily on umbrella companies and is quite prepared to blow those away that try to bend the rules too far.
There is a real danger, therefore, that the flexibility and benefits that come from working through an umbrella company may not be preserved for the future if unscrupulous umbrella operators are allowed to continue until the Government decides that enough is enough.
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