Contractors Umbrella Company Future – Limited Companies Doomed

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Contractors Umbrella Company Future
Contractors Umbrella Company Future

Contractors Umbrella Company Future

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It looks as we are going to see Contractors Umbrella Company Future looming in the lights.

It doesn’t look as if the Hammond and May partnership want to see contractors in Limited Companies any more.

What is the evidence for those statements?

Well Hammond and May both agree on one thing. They believe that employees, the self employed and those who incorporate should pay the same amount of tax and national insurance if they earn the same amount of money.

That doesn’t happen now. Those using limited companies pay less tax and national insurance than permanent employees.

Contractors Taking Money in Dividend Payments

That’s because they take much of their money in dividend payments rather than as salary. They save both on tax and national insurance contributions.

May and Hammond don’t think that’s fair.

What’s more they intend to change it.

Indeed Philip Hammond said that people should not be choosing incorporation because of tax considerations.

National Insurance Increase for Contractors

Hammond and May have gone a step towards taking away the differential by:-

  1. Increasing Type 4 National Insurance from 9% to 11%
  2. Cutting the Dividend Allowance from £5,000 to £2,000.

However, even though they have done this, there is still a differential between those using limited companies and employees.

So, if May and Hammond think that any differential is unfair, they can’t be finished yet.

This must just be the first step.

This must be just what they think they can get away with in one step.

Indeed, they can hardly get away with this.

So, just imagine the outcry if they had completely got rid of the differential in just one go?

So, it looks as if they have gone for the most they think they can get away with at one go.

Unless they are going to leave in place something that they think is very unfair, it would stand to reason that they want eventually to have no unfairness.

Complete Parity in Tax and National Insurance Contributions

They’ll want to have complete parity in tax and national insurance contributions between contractors and employees earning the same amount of money.

They see that as fair.

So, we must assume that this is their medium term objective.

So, will they allow contractors to remain in limited companies?

Public Sector Contractors

Look what they are doing in the public sector.

Contractors can no longer decide their own IR35 status in the public sector.

It is down to the Government department who hires them.

Those Government departments are not experts in IR35.

Although it is not compulsory, what is happening in practice is that some Government departments are funking it and declaring that they will no longer take on contractors using personal service companies.

Public Sector Contractors Umbrella Company Future

Indeed, although the story has been that contractors are intending to leave the public sector in droves over this, the real story is that, in practice, most of them are being forced into using umbrella companies instead of their limited companies.

The other option for Government departments is to ask contractors to sit the new HMRC IR35 test.

If they pass it, they can keep using their limited companies.

If they fail, either their agency must deduct national insurance and tax from their income or they must join an umbrella company.

However, they could fall into a HMRC IR35 Trap here and find themselves under investigation for previous contracts.

Going through an umbrella company is still a little better than paying IR35 tax.

That’s even taking into account the fact that the Government stopped umbrella company contractors from offsetting travel and subsistence against tax – unless they are outside IR35.

But why would anyone use an umbrella company if they are outside IR35?

From Personal Service Companies to Umbrella Companies

Public sector contractors are dumping their personal service companies in droves at the moment.

Indeed, there is currently a feeding frenzy as umbrella companies snap them up.

So, what does the Government think of umbrella companies?

They see them as a tax avoidance device.

Disguised Employees and Disguised Contractors

If IR35 was set up to catch ‘disguised employees’, umbrella companies have created a new entity of ‘disguised contractors’.

Whereas ‘disguised employees’ are really only contractors for tax purposes, umbrella company contractors are only employees for tax purposes.

In all other ways they act as contractors.

What other ’employees’ have to pay their employers a monthly fee just to pay them?

All Contractors are Tax Avoiders

Indeed, the Government see all contractors as tax avoiders.

That’s even clearer from some of Hammond and May’s recent announcements.

Although, the Government see umbrella companies as tax avoidance schemes, they see a use for them.

They would rather deal, and legislate for, a few hundred umbrella companies than 4.8 million self employed and incorporated freelancers.

They know that the umbrella companies will enforce any legislation that they come up with.

HMRC would rather receive huge regular payments from a few hundred umbrella companies than have to deal with 4.8 million individual contractors.

Look to Contractors Umbrella Company Future

So, it looks as if the future for most contractors will be in umbrella companies.

After all, HMRC say they expect 90% of contractors to fail their new IR35 test.

There will be very little financial benefit for contractors compared to employees.

I would expect that the Government will just make it enough so that they stay in umbrella companies rather than just paying IR35 tax.

Contractors Umbrella Company Future in Private Sector

Some contractors are saying that there is no evidence that the Government intend to implement this in the private sector too.

Well, there is a bit of evidence.

Some contractors who contract to firms who do work for the public sector have been told that they will have to dump their personal service companies and operate through umbrella companies.

So, basically the Government is hitting as many contractors as they can without changing the legislation.

They are hitting those contractors they use and they are hitting contractors working for companies that supply the Government.

Hammond and May’s View of Contractors

So, if Hammond and May say that people shouldn’t incorporate with the objective of saving tax, and they say that contractors and employees who earn the same amount of money should pay the same amount of tax and NI, then they surely are not going to allow private sector contractors to ‘get away with’ this for too much longer.

Otherwise they would be running with something that they see as grossly unfair.

Indeed, it would be unfair if public sector contractors are hit by this and not private sector contractors.

Rolling Out IR35 Changes in Private Sector

The Government know that it is more complicated to implement this in the private sector.

They would have to change legislation. It would be challengable in the courts.

However, it shouldn’t be too hard to make the person who decides a contractor’s IR35 status as someone at the client company hiring them.

Some contractors believe that private sector companies would be more likely to take a risk with contractors IR35 statuses.

But why would they?

Why would the take the risk?

Contractor Rates to Increase?

Other contractors are saying that if contractors taxation increases then contract rates would have to increase to compensate.

However, contract rates are driven by the marketplace and not by how much contractors consider they need.

It’s the economic laws of Supply and Demand.

Rates would only rise if the supply of contractors fell. If lots of contractors stopped contracting this would cause rates to rise.

However, it is far more likely that the vast majority of contractors would stay contracting. They would just have to put up with paying more of their income in tax.

Contractors Umbrella Company Future in a Few years Time

So, looking a few years down the line I would say that most contractors (perhaps the 90% that HMRC believe will fail their IR35 test) will be forced into using umbrella companies.

Those contractors will be marginally better off than employees.

Then Hammond and May will have their wish.

Contractors umbrella company future looks certain.

Contractors and employees, who earn the same amount of money, will pay the same amount in tax and national insurance contributions.

And the world will live as one.

Imagine that!

If you have any views post them in the section below.

See also, Secret HMRC IR35 Plan for Private Sector Contractors – Tougher Rules.

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