What is an Umbrella Company – Meaning / Definition

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Contractor umbrella companies

What is an Umbrella Company?

So, you may ask, what is an Umbrella Company?

Prior to 1999 there were practically no contractors in Umbrella Companies.

However, the advent of IR35 led to their rapid expansion.

IR35 was put in place to stop the practice of companies laying off employees on a Friday and starting them as contractors on the Monday.

However, the legislation caught far more than those in its net.

Contractor Questions on Umbrella Companies

  1. What is IR35 Legislation?
  2. What are the benefits from using an umbrella company?
  3. What timesheets and expenses do the umbrella company need from contractors?
  4. What is an umbrella company and what monthly fees do they charge contractors?
  5. Why are umbrella companies favoured by the Government?

What is IR35 Legislation

Contractors were having to decide whether they should continue to run Personal Service Companies or whether they should declare themselves caught by IR35.

In the end very few contractors chose the IR35 route.

This is because of the advent of the PAYE Umbrella Company.

Contractors became employees of this new entity.

What are the Benefits from Using an Umbrella

What is an Umbrella Company good for?

It allowed contractors to be able to earn contractor rates but be treated as permies by the taxman.

It means that they pay more tax than a contractor using a Personal Service Company but they are able to claim a certain amount of expenses which a permanent employee could not.

What Timesheets and Expenses Do the Umbrella Company need from Contractors

The Umbrella Company does everything for them except enter the timesheet and expenses details and spend the money.

The PAYE Umbrella Company invoices the client, deducts the tax, minus the expenses, pays the contractor and pays the taxman.

There is no need for any VAT returns or to prepare end-of-year accounts.

What is an Umbrella Company and What Monthly Fees Do they Charge Contractors

The Umbrella Companies charge their contractors a monthly fee but the contractor saves on what he or she would have spent on an accountant so there is not too much difference.

There are now more than 200,000 contractors in Umbrella Companies and this number is increasing.

The Government appear to prefer contractors to operate through Umbrella Companies rather than Personal Service Companies for obvious reasons (they pay more tax and NICs).

Originally it was thought that these were devices to artificially save contractors from paying their full whack of IR35.

It was thought that the Government would eventually shut them all down.

Why are Umbrella Companies Favoured by the Government

However, it appears now that the Government favours Umbrella Companies.

After all, it is much easier to legislate for and manage a few hundred Umbrella Companies than hundreds of thousands of contractors individually.

If it means letting contractors claim a few expenses that appears to be fine by them.

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Many private sector contractors are likely to be told by their client company either that they must operate as an off-payroll employee or join an umbrella company. It’s time to plan for that now.

They need to look at umbrellas ASAP.

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