Umbrella Companies for Public Sector Contractors – IR35 Choice

Umbrella Companies for Public Sector Contractors

Umbrella Companies for Public Sector Contractors

We are now seeing a massive take-up of umbrella companies for public sector contractors.

This is due to the Government changing the rules for contractors who work in the private sector.

They have now taken the IR35 decision out of contractors hands and it is the Government department who will now decide a contractor’s status.

The contractor can appeal this – to HMRC.

(Pause for a chuckle)

New Online HMRC IR35 Test

HMRC are telling us that they are devising an online IR35 test which will show whether a contractor is inside IR35 or outside it.

Of course, it will do nothing of the kind.

It is the laws of the land and the courts which decide that.

They have already told us that they are going to ‘cheat’ with this test.

Even before they have unveiled it they are telling us that they expect 90% of contractors to fail it.

How can that be?

Currently more than 90% of contractors are OUTSIDE IR35.

Indeed, when HMRC investigate contractors for IR35 they have a very low success rate.

And they must surely be picking what they see as the likeliest candidates.

Keep Using Their Personal Service Companies

Of course, most public sector contractors would prefer to keep using their personal service companies.

However, they are taking a big risk if they ask to sit the online IR35 test to try to prove their status.

The results are relayed to HMRC.

If the contractor fails the IR35 test, and has previously been using a personal service company on previous contracts, he, or she, is a prime target for investigation.

Government Picking on Contractors in the Public Sector

It’s easier for the Government to attack contractors in the public sector than in the private sector.

To hit those in the private sector they have to change the IR35 legislation.

Then they might have to fight long battles in the courts.

With public sector contractors they can just change their ‘house rules’.

After all, employers can make any rules they want when hiring contractors.

No Longer Taking Contractors Using Personal Service Companies

Some Government departments are now taking the easy way out and saying that they will no longer take on contractors using personal service companies.

The news on contractor websites has been about the number of contractors who have either quit the public sector because of this, or who plan to before it comes in during early April.

Umbrella Companies for Public Sector Contractors Option

However, an even bigger story is about the number of contractors who are dumping their personal service companies and going en masse to umbrella companies.

There is a big sudden uptake in umbrella companies for public sector contractors.

Sudden Demand for Umbrella Companies

Another contractor website owner told us that he was snowed under by public sector contractors wanting umbrella companies.

A provider of umbrella company services told us that they are snowed under too.

They are telling us that they are getting one contractor applying to join them from a public sector department and then getting the contact details from him, or her, of other contractors in the department who want them to contact them about joining them.

It’s an absolute stampede of public sector contractors out of PSCs and into umbrella companies.

Many more are doing this than leaving the public sector.

I’m sure that many more of them would like to quit.

Public Sector Business and Systems Knowledge

However, the reality is that their skills and business knowledge pertain to the public sector and they are not going to be at the front of the queue for contracts with banks, telecoms companies or oil companies.

So, for many, the reality of the situation is that they have to join umbrella companies.

And that is what most are doing in their hundreds and thousands.

It looks like it is umbrella companies for public sector contractors now for the most part.

Ad – Simply Umbrella – Simply the Best

New umbrella product Simply Umbrella came into being to solve this problem.

It adheres to all the new tax rules. They created it after the Chancellor’s spring statement.

It’s just like other umbrella companies in that the contractor is an employee of Simply Umbrella but they get to keep far more of their money than through an ordinary umbrella company.

It could be a great solution for both public sector contractors IR35 problems and indeed any contractor.

To find out more just click on Simply Umbrella.

Or simply fill in the form below and they will be in touch.

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Umbrella Companies Referral Fees to Agencies – Ask Them

Umbrella Companies Referral Fees to Agencies

Umbrella Companies Referral Fees

One thing of which contractors are often not aware, are umbrella companies referral fees to agencies to get them to put contractors their way.

Sometimes agencies tell contractors, especially new contractors, that they must join a particular umbrella company.

More often, they are told that they must join an umbrella company on the agency’s preferred supplier list (PSL).

Often, contractors just comply with that without question.

2010 Bribery Act and Umbrella Companies Referral Fees

Other times, agencies tell contractors that the umbrella company they want to use is not on the agency’s Preferred Supplier List. Therefore, agencies tell them, they cannot use them.

This may be contrary to the 2010 Bribery Act.

Umbrella Companies Referral Fees

Umbrella Companies Referral Fees given to agencies for contractors

The agency cannot put undue pressure on a contractor to join a particular umbrella company, or set of umbrella companies.

Umbrella Company Contractors Options

So, what can a contractor do when the agency tells them that they must join a particular umbrella company or one on their Preferred Supplier List?

The first thing that they can do is that they can refuse to do so. They should tell their agency that they are going to use a different umbrella company.

They should do this in writing, e.g. via email.

Undue Pressure to Join Umbrella Company

This ramps up the pressure on the agency. Previously, they could have said that they were not using undue pressure to get a contractor to use a particular umbrella company. They were only recommending one.

However, if they refuse this reasonable, documented request from the contractor then they have upped the stakes.

It would be hard for them to argue, here, that they were only just recommending a particular umbrella company, or set of them.

Ask Agency About Umbrella Company Referral Fee

The second thing that a contractor should do, in response to a demand from the agency to join a particular umbrella company, is to ask the agency if they get an umbrella companies referral fee if a contractor joins up with an umbrella company recommended by them.

The contractor should, once again, put that information request in writing.

Umbrella Company News UK Contractors need

Umbrella Company News for UK contractors

The agency, may, or may not, respond in writing but the very request shows that the contractor has concerns.

Agencies are all very aware of the 2010 Bribery Act.

Refuse to join Their Recommended Umbrella Company

While they put the pressure on contractors to join particular umbrella companies, they also know where the line is. That is even if they sometimes cross it.

By asking these questions the contractor is weakening the agency’s resolve to insist that the contractor joins a particular umbrella company.

Once that resolve has been weakened, the contractor is then in a stronger position. He, or she, should write to the agency saying that he, or she, will not be joining the umbrella company recommended (or forced on them, to be frank), by the agency.

Using Undue Pressure to Join Umbrella Company

They should say that they feel that the agency had put undue pressure (using that very phrase) on them to join a particular umbrella company, or group of them.

The agency will understand the significance of that.

They can then inform them which umbrella company that they will be joining.

In the correspondence to the agency, the contractor should include at least one senior person on the CC list.

Include Finance Director

There’s always the possibility that the actual agent you are dealing with is chancing his, or her, arm in order to get extra commission.

They may not be as fully aware, as senior people in the company would be, of the consequences of breaking the 2010 Bribery Act.

The Finance Director would be a good one to CC in on your emails.

Recruitment Agencies Inducing Contractors to Join Umbrella Companies

Recruitment Agencies Inducing Contractors to Join Umbrella Companies

They are ultra cautious, unlike salespeople. They understand better than anyone else at the company the full ramifications of breaking the 2010 Bribery Act.

They are also very powerful at a company, ranking only behind the Chief Executive and the Chairman. They rank ahead of an individual salesperson’s boss.

Contractor Should Stand Firm on Refusing Umbrella Company

The agency may bluster (as they do) but the contractor must stand firm when he, or she, wants to use an umbrella company not on the agency’s Umbrella Company Preferred Supplier List.

Although they would like to get the umbrella companies referral fees they don’t want to put their company in danger of breaking the 2010 Bribery Act. This would have very serious consequences for them.

Favourite Umbrella Companies for UK Contractors

Favourite Umbrella Companies

Favourite Umbrella Companies

Many people have their favourite umbrella companies. That’s especially true for agencies who tend to only include those umbrella companies on their Preferred Supplier List who give them bungs for sending contractors their way.

The 2010 Bribery Act bans this but it happens.

However, that’s another story.

So, what constitutes a favourite umbrella company?

Dodgy Umbrella Companies

Firstly, one that doesn’t try to con you in the contract.

Make sure you read the contract and if you see any clause detailing any penalties for leaving the umbrella company, run a mile.

Umbrella Company Recommendations for UK Contractors

Umbrella Company Recommendations for UK Contractors

If they are being sneaky and duplicitous in the beginning that’s because they are, well, sneaky and duplicitous.

If you go with that umbrella company you really have started off on the wrong foot.

Umbrella Company Recommended by Agency

So, should you go with the umbrella company recommended by your agency?

You would if you were an idiot.

There’s almost certainly one reason, and only one reason, that your agency are recommending a particular umbrella company to you and that is that they expect to get a fee from the umbrella company for every contractor that they send them.

What about that then?

Too many contractors think of their agency as their agents, e.g. like the Mr. Ten Percents in the Acting and Football professions, who look after their clients’ interests.

Nothing could be further from the truth.

‘Your agent’ wants to extract as much money as he, or she, can from you. If they can possibly take half of the rate that is paid by the client for you then they would happily take it without any scruples.

Umbrella Company Preferred Supplier Lists

If your agency demand that you use a particular umbrella company, or an umbrella company on their Preferred Supplier List, you should refuse to do so.

If they tell you that you have to, ask them to put that in writing and see how they react.

It is illegal under the 2010 Bribery Act for agencies to induce contractors to join a particular umbrella company for a fee.

Don’t worry about standing up to them.

Umbrella Company Costs

Umbrella Company Costs for UK contractors

They won’t dump you. The main fee you get for them is the margin they get on your weekly earnings.

The bung the umbrella company give them is just a bit extra on the side.

They are not going to reject the main course for a little dessert.

Your Favourite Umbrella Companies

Your favourite umbrella companies should pay you weekly and pay you on receipt of your timesheets.

Certainly run a mile from an umbrella company who say “we’ll pay you when we get paid” or make you wait for payment.

Many umbrella companies pay you straight away so use one of them.

Umbrella Company Fees

Before you join an umbrella company, examine the fees they charge and what you get for that.

Don’t necessarily go for the cheapest. Go for the best service at the best price. Look at what they are throwing in.

Umbrella Company Fees and charges

Umbrella Company Fees and charges for using them

See, if they throw in are any insurances like Professional Indemnity Insurance.

They can purchase these insurances in bulk so they can get them for you more cheaply than if you applied for the insurances yourself.

Tax Deductible Umbrella Company Expenses

One thing that is very important, if they are to be among your favourite umbrella companies, is to find out of they’ll help you to claim expenses as tax-deductible – and what expenses you can claim.

You can more than cover the cost of your umbrella company fees by setting expenses off against tax.

Umbrella Company contractors already pay an average of £10,000 a year more in tax and national insurance contributions than a personal service company contractor does.

Don’t make it even worse by not offsetting your expenses against tax.

Umbrella Company Contractors Who Don’t Claim Expenses

I was astonished to find that between 50% and 60% of umbrella company contractors don’t claim any expenses at all.

That would increase the tax differential between umbrella company contractors and personal service company contractors to perhaps £15,000.

Soon you’ll be talking real money.

Travel and Subsistence Expenses

From April 2016, umbrella company contractors are longer be able to offset travel and subsistence expenses against tax if they are Supervised, Controlled and Directed by their client when working for them.

It would be relatively easy for you to change your contract and working practices to make it  so that you aren’t Supervised, Controlled and Directed by the client.

Umbrella Company Comparison

Umbrella Company Comparison for UK contractors

If the client previously gave you a piece of work, told you how long it should take and told you how to do it, supervised you doing it and where you should do it, negotiate a change in the contract and working practice here.

Supervision, Direction and Control

You are an experienced contractor.

Agree the piece of work to be delivered by the client and get the agreement signed off. Do the same with the estimate for the project. Agree that and get the agreement signed off. Agree where it is best done, at your home office or at the client’s site and document that agreement.

You surely don’t need to be supervised in doing the task. When the task is delivered ask your customer to give you a signed acceptance on what you have delivered to them.

If your umbrella company won’t give you advice on how to get these expenses offset against tax after April 2016 it may be because they don’t want you to be Unsupervised, Uncontrolled and Undirected.

They may not want not to change your contract to reflect your new way of working.

Outside IR35

Why, would they not want to do this?

One good reason, from their point of view, is that Supervision, Control and Direction is one of the three major planks of IR35.

The other two major planks are the Right of Supervision and Mutuality of Obligations, i.e. the obligation for them to pay you for turning up and for them to pay you whether there is work for you or not.

IR35 and UK Contractors - Inside or Otsideu

IR35 and UK Contractors and the tax they pay

If you are able to get outside the first plank of IR35, i.e. Supervision, Direction and Control, and you enter a Right of Substitution clause in your contract, then you are only a very short step away from being outside IR35 altogether – and not have to lose all that money each year by being in an umbrella company.

Maybe that’s why many umbrella companies are not too bothered about their contractors not claiming any expenses at all against tax.

Onshore or Offshore Umbrella Companies

Of course, the favourite umbrella companies for contractors could be either onshore ones or offshore umbrella companies.

The average IT Contractor earns £425 a day. That equates to around £100,000 a year once you take out time off.

An onshore PAYE umbrella company contractor would keep somewhere between £60,000 and £65,000 in tax and NI contributions.

Offshore Schemes for UK contractors to save tax

Offshore Schemes for UK contractors to save tax

An offshore umbrella company contractor would keep somewhere between 85% and 90%, depending on circumstances, mostly on what they earn.

Umbrella Company Alternatives

So, the offshore umbrella company contractor could be keeping as much as £40,000 more than an onshore umbrella company contractor – particularly one who doesn’t claim any expenses.

Other alternatives to onshore umbrella companies include Tax Efficient Limited Companies for Contractors.

Both return £85% or more to contractors.

Umbrella Companies Dilemma over Supervision, Direction and Control

umbrella companies dilemma on supervision, direction and control

Umbrella Companies Dilemma

The Chancellor Osborne’s Autumn Statement and 2016 Finance Bill has caused a huge umbrella companies dilemma.

The Chancellor has said that all Umbrella Company contractors will be deemed to be under the Supervision, Control and Direction of their clients – unless it can be proved otherwise.

This would mean that they are no longer able to offset travel and subsistence expenses against tax.

As this is the main expense that umbrella companies can claim for their contractors, it means that their contractors are going to take a huge hit in their pockets.

Umbrella Companies will have to tell contractors this before April and before they notice a huge chunk mission from the money returned to them.

Umbrella Company Expenses

Umbrella Company Expenses explained

Leaving Umbrella Companies or Staying

It will also mean that many of those contractors will have a decision to make, whether to stay with their brolly or to take themselves out of IR35 and use a personal service company.

Some contractors will stay and some will go.

They have to pay upwards of £100 a month to umbrella companies, basically just to pay them.

This was offset by what they would save on an Accountant and even more by what the umbrella company could offset in taxes for them.

What they gained was more than they paid out to the umbrella company.

So, it was worthwhile for them to stay in the umbrella company rather than pay the IR35 tax.

Autumn Statement and Finance Bill

However, that situation has now changed after the Autumn Statement and Finance Bill 2016.

The main expense they could offset against tax was the travel and subsistence expenses.

That will be gone from April 2016.

So, many umbrella company contractors will now be paying the umbrella companies more than they are saving in tax.

The contractors will have a decision to make and so do the umbrella companies.

Umbrella Company News UK Contractors need

Umbrella Company News for UK contractors

Changing the Contract for SDC

However, the brollies will now have a dilemma.

Should the umbrella companies try to take contractors outside the Supervision, Direction and Control of clients?

In terms of the contract this should not be too hard to do.

The contract would say that for any task, or piece of work, the client would have to agree this with the contractor.

They would have to agree the estimate too.

Employers tell permanent workers what to do and how long it should take. Suppliers, with a contract for services, would agree with their customer what should be delivered and when.

Changing Contractors Working Practices

As I said, it would be easy enough to change contracts to reflect this. After all, umbrella companies normally have a cosy relationship with agencies who supply them with contractors.

Providing the client is reasonable, and most are, they would be happy to change the contractor’s working practice to match the contract.

Both parties would agree the piece of work,  as would the estimate. The contractor would complete the task unsupervised, using his, or her, own knowledge and experience.

Of course, they are taking a bit of a risk. If they got it wrong they could get hit for the missing tax.

However, theres is no reason to get it wrong,

It’s fairly simple. The contract HAS changed. The relationship between the contractor and the client HAS changed to a customer / supplier relationship in terms of agreeing what has to be delivered and the time it should take.

So, it is not fraudulent. It is just a fact – a change way of working.

Working through Umbrella Companies

Working through Umbrella Companies for maximum returns

Umbrella Company Options and Choice

So, here’s the umbrella companies dilemma.

Here is their Catch-22.

If they do help the contractor to be unsupervised, working without direction and uncontrolled by the client, this would get the contractor his travel and subsistence expenses back again.

That might save him, or her, £5,000 a year.

It might make it more worthwhile to stay with the umbrella company.

Contractor Now Outside IR35

However, it would also take him, or her, closer to being outside of IR35.

This would mean that he, or she, could now work through a personal service company.

Personal service company contractors pay an average of £10,000 a year less in tax than an umbrella company contractor.

There are three main IR35 factors which point to you being caught by IR35 or outside it.

Major IR35 Factors

They are:-

1 Supervision, Direction and Control

2 The Right of Substitution

3 Mutuality of Obligation

IR35 and UK Contractors - Inside or Otsideu

IR35 and UK Contractors and the tax they pay

Right of Substitution Contract Clause

We know, from a previous court case, that you can easily insert the right of substitution into your contract and a named substitute and that the burden of proof is with HMRC to prove that it was a sham.

They could only do that if the client triggered the substitute clause and the substitute failed to show up. That court verdict must have had HMRC gnashing their teeth.

So, of the three main pointers to IR35, putting a right of substitution clause that will never be triggered into your contract would allow you to tick that box.

The umbrella company has just helped the contractor to be outside the Supervision, Direction and Control IR35 factor.

So, the contractor is able to tick off two of the three main IR35 boxes.

Keeping More of a Contractor’s Income

He, or she, would naturally think “Maybe I can get outside IR35 and set up a personal service company so that I could save not just the £5,000 for travel and subsistence but also another £10,000 a year on top of that”.

So, that is the umbrella companies dilemma.

Should they arrange with the agencies and clients to change the contracts fo some of their contractors to take them outside the Supervision, Direction and Control clause?

This would mean that they could still claim their travel and subsistence expenses which might come to more than the monthly fee that the contractor pays to the umbrella company?

Intermediaries Rules for Contractors

Intermediaries Rules for Contractors over IR35

Big Question for Contractor Umbrella Companies

The big question for them is this:-

Will getting contractors outside Supervision, Direction and Control of the client be more likely to get umbrella companies contractors to stay with them or be more likely to show them how it is done and make it easier for them to leave the umbrella and set up a personal service company.

That’s the 64 million dollar question for umbrella companies.

They are going to have to decide, before April, whether they are going to open that box or keep it shut.

They are going to have to decide whether to twist or stick.

That is the umbrella companies dilemma and they need an answer to it well before April.

So, what will they do?

I’m absolutely certain which option they will take – but that is for another article.

Umbrella Company Alternatives

If they don’t answer it correctly, contractors could jump ship to Limited Companies or Offshore Umbrella Companies.

Tax Efficient Limited Partnerships

Tax Efficient Limited Partnerships for UK contractors

 

Offshore Umbrella Companies Viable Alternative to Limited Companies

Offshore Umbrella Companies Viable Alternative

Viable Alternative

HMRC and Chancellor Osborne have taken away travel and subsistence expenses, as a taxable deduction, from PAYE umbrella company contractors. So, are offshore umbrella companies a viable alternative?

There are over 200,000 umbrella company contractors in the UK.

They pay a monthly fee of over £100 to PAYE umbrella companies, basically just to pay them.

Caught by IR35 Tax

Those contractors in umbrella companies were normally those who:-

  1. IR35 caught,
  2. IR35 Maybe caught them and they didn’t want to take a chance or
  3. they just wanted their admin done and get paid without any hassle.

There are others, still, who unscrupulous recruitment agencies shoehorned into joining umbrella companies. They  just wanted the bung they would get for sending contractors their way by the umbrella companies.

Under the 2010 Bribery Act this is illegal. However, it is well know that this happens.

Umbrella Company Contractors

Umbrella Company Contractors alternatives

Personal Service Company Contractors

Those contractors who operate through personal service companies pay around £10,000 a year less in tax and NI contributions than PAYE umbrella company contractors on average.

This could rise to up to £15,000 now that umbrella company contractors will no longer be able to offset travel and subsistence expenses against tax, from April 2016.

Many contractors will just stay with their umbrella companies as that is all they know. Many of them were not even claiming expenses against tax anyway.

Others will stay because they reckon they IR35 catches them and have no alternative anyway.

Best Umbrella Company Alternatives

Others, who agencies shoehorned into them, or who do claim travel and subsistence expenses against tax in umbrella companies, will have a look around to see if there are any alternatives.

They may make another assessment to see if IR35 really catches them.

Even if IR35 does catch them,, they may seek advice as to how to take themselves out of it by changing their contracts and working practices.

After all, they could be up to £15,000 a year richer if they were not operating through an umbrella company but using a limited company.

Offshore Umbrella Companies as an Alternative

Some may go further and look at using offshore umbrella companies as an alternative.

They could save even more money as those offshore umbrella companies can let UK contractors keep perhaps from 85% to 90% of the money that they earn.

They could keep £25,000 to £30,000 a year more than they could keep by operating through an onshore umbrella company.

offshore umbrella company list

Offshore Umbrella Company List

This will tempt many contractors. After all this adds up over a number of years.

It can make offshore umbrella companies a viable alternative.

For a list of offshore umbrella companies click on Offshore Umbrella Companies for Contractors.

Umbrella Companies Contractors Alternatives After April

Umbrella Companies Contractors Alternatives

Umbrella Companies Contractors Alternatives

Are you looking for umbrella companies contractors alternatives?

Umbrella Companies in the UK are under a severe threat that would be a severe blow to the solar plexus. It would leave 200,000 umbrella companies wondering whether it would be worthwhile staying in an umbrella company or looking for another solution.

The Chancellor has already told us that he is going to abolish the ability of umbrella company contractors to offset travel and subsistence expenses against tax.

Umbrella Company Recommendations for UK Contractors

Umbrella Company Recommendations for UK Contractors

It is mainly contractors who fear that they are inside IR35 who join umbrella companies.

Disguised Contractors in Umbrella Companies

The umbrella companies disguise these contractors as employees of the umbrella company and they deduct PAYE from the contractors’ income.

In all other ways the contractor behaves like a contractor.

The umbrella company performs no other function other than to disguise contractors as employees for tax purposes and pay them accordingly.

They allow for tax deductions like travel and subsistence, pay the contractor and send the PAYE to the taxman.

If contractors were to just pay the IR35 tax they would not be able to claim much in the way of tax deductions.

Tax Deductible Travel and Subsistence Expenses

However, using the ruse, or device, of the umbrella company, they are able to claim certain things against tax.

These include travel and subsistence, equipment costs (e.g. their PC), pension contributions and membership fees of trade organisations.

However, the most important of these is the travel and subsistence that they can claim as deductible.

Conservatives Bashing Contractors Again

However, the Conservative Government, in the guise of Chancellor George Osborne, intends taking it away from them.

To be fair, they are also going to take it away from personal service company contractors too.

They couldn’t be fairer than that, could they?

Umbrella Company Contractors Monthly Fee

Umbrella Company contractors pay a fee of normally over £100 a month for their umbrella company, basically, to pay them.

They must be the only ‘permanent employees’ who their company charge  just to pay their salaries.

It was worthwhile, previously, for contractors to pay that fee because they would get more back in tax-deductible allowances than their month fee.

Doing a financial bean count they still came out on top.

However, a financial bean count, after this, may well show that the money they are paying their umbrella company to pay them, and do their admin, is more than they are able to claim back in tax-deductible expenses.

They may as well just pay the full  IR35 tax. It might be cheaper for them to do so.

Contractors Staying with Umbrella Companies

Some contractors will stay with the umbrella companies. They will be those who are happy to pay the umbrella company to do their admin for them even though they lose out financially.

There will also be those contractors shoved unceremoniously by their unscrupulous agencies into umbrella companies, against their interests, so that the agencies can continue to get ‘bungs’ from the umbrella companies for doing so.

Inducing contractors to join an umbrella company is illegal under the 2010 Bribery Act – but we know it happens.

However, many contractors will be looking for alternatives to umbrella companies.

Here are some umbrella companies contractors  alternatives worth looking at.

Personal Service Companies (Limited Companies)

Although the Conservatives intend to take the travel and subsistence allowance from personal service companies too, there are still lots of other tax-deductible expenses that a limited company contractor can claim.

Indeed, it is reckoned that limited company contractors pay an average of £10,000 a year less in tax and NI contributions than an umbrella company contractor.

So, umbrella company contractors may seek to change their contracts, and working practices, to take themselves outside of IR35.

Many of those contractors using umbrella companies were those who weren’t sure if they were inside IR35 or outside IR35.

They didn’t want to take the chance of an IR35 investigation which may take years and cost them tens of thousands of pounds of back tax and fines if they lost.

However, with these changes to allowances that they can claim they may well be more willing to take a little bit more risk for more rewards.

Tax Efficient Limited Companies

These are similar structures to the common or garden limited companies.

However, they manage contractors income in the most tax-efficient way to give them returns of 85% or more.

Limited company contractors can continue to use their existing limited companies going this route.

An example of one of those, and how they do it, is here – Tax-Efficient Limited Companies.

Offshore Umbrella Companies

Multi-national companies and high net worth individuals, as well s hedge funds, have long used offshore companies to save on tax.

Now contractors are taking advantage of UK tax laws to do so too.

They can get keep 85% or more of their income using these.

For more information see Offshore Umbrella Companies List for UK Contractors.

The contracting world is now very different to the one that we are used to.

Those that plan in advance will be those who will not miss out.

To be forewarned is to be forearmed.

Best Financial Options for Contractors Now

Best Financial Options for UK Contractors

Best Financial Options for Contractors

We look at the best financial options available for UK Contractors.

Retention levels available for contractors

One of the key decisions for contractors is which method to contract through.

This impacts on the amount of your fee you actually keep after taxes, administration and accountancy.

They have put this further into the spotlight following the changes to dividend taxation and travel and subsistence expenses for employees.

However, these changes will have a negative impact on the amount of money that will end up in your bank account.

So, contractors will pay extra amounts in tax and national insurance once the changes come into force.

Below is a summary of the options available and a summary of their position for tax and the likely level of retention a contractor can expect.

For the purposes of the article we will assume that the contractor is a single IT worker, of 40 with a standard tax code and a 12 month contract for £350 per day.

He works 5 days per week and 48 weeks of the year (annual income of £84,000).

This worker spends £8k per year on travel and subsistence.

Self Employed Contractors

There has been no significant impact to the status of a self-employed person. As before, the key obstacle is IR35 (and the rules are going to be subject to revision).

So, a self-employed person has to pay Income Tax and class 2 and 4 National Insurance.

Other than the deduction of expenses that relate directly to their employment, there are no commonly used methods of tax planning.

In addition, the self-employed person has to either undertake all administration for invoicing and collection.

Plus they also have the responsibility for making payments for tax when they fall due, or engage an accountant to do this.

There may be a large tax bill at the end of the period to settle.

So, the contractor here would retain 67-78% of their income.

Limited Company Contractors

The ability to use dividends is a key element in tax planning for those contractors who operate Limited Companies.

Dividends are taxed at a much lower rate than salary. There is currently an effective rate after tax credit of

  1. 0% up to £31,785,
  2. 25% above this up to £150,000, and
  3. 30.56% on any earnings above £150,000.

Going forward the removal of the tax credit on dividends will result in dividends being taxed at 10% up to £31,785.

Although there is a £5,000 tax-free dividend allowance.

They will tax them at 32.5% above this up to £150,000. They will aslo tax them at 37.5% on any earnings above £150,000.

So, this change will have a huge impact on contractors that operate a Limited Company. The benefit of making drawings in the form of dividends rather than salary has been greatly reduced.

In the 2014-15 tax year, our Limited Company contractor could retain 72.92% of their income.

However, moving forward into the 2015-16 tax year this will drop to 65.79% due to the changes in dividend tax.

There will, also, be costs associated and administration associated with the operation of a Limited Company.

There will, also, potentially be the need to control invoicing and collect payments.

Umbrella Company Contractors

Becoming an employee of an Umbrella has been a popular method of tax planning and also reducing the administrative burden for contractors.

The Umbrella will manage all invoicing, collection and taxation matters and pay the contractor their net fee.

By becoming an employee of the umbrella, it enables the company to deduct travel of subsistence expenses. These are not allowable deductions of self-employed workers.

Therefore, in the case of our contractor, using an Umbrella under current rules would provide a retention of 63.96% of their fee.

So, going forward into the new rules for Umbrellas, the retention drops to 59.30%.

Limited Partnerships Compliance with UK Tax Rules

Among the rules they have ensured their compliance with are:

1. Transfer of Assets Abroad Legislation – Chapter 2, Part 13 ITA 2007

2. DOTAS

3. GAAR – Section Part 5 FA 2013

4. IR35

5. Part 3, Chapter 7, ITEPA 2003

6. The newly announced Onshore Intermediaries guidance, 9 July 2015

Best Financial Options for Contractors Summary

So for each of the four options, the expected retention after taxes and fees is as follows:

Route                  2014-15  2015-16

Self Employed        67.78%      67.78%

Limited Company  72.92%  65.79%

Umbrella                   63.96%  59.3%

Tax Efficient Limited Company –  No less than 85%  No less than 85%

So, choose the best financial options for you.

Umbrella Companies Future – Do They Have One?

Umbrella Companies Future now

Umbrella Companies Future

Contractors are asking, now, about Umbrella Companies future after the Chancellor’s summer budget.

In the budget the Chancellor has taken away the ability of onshore umbrella companies to claim tax relief for contractors on travel and subsistence.

This was the main reason for contractors, inside IR35, to be in PAYE umbrella companies.

IR35 Tax and Contractor Umbrella Companies

Contractor umbrella companies sprung up in 1999 when the IR35 tax came onto the statute book.

Very few contractors actually pay the IR35 tax.

From memory, I think that the Government only collect around £12m a year from it which is a tiny amount. It was not worth creating a tax just for that amount of money.

However, what most contractors, who were inside IR35, did was to go into onshore umbrella companies.

Contractors Inside IR35

They paid more tax than their fellow contractors who were outside IR35 and continued to use limited companies.

However, because of the travel and subsistence expenses that their umbrella companies were able to claim on their behalf, for working away from their main office, they paid less than those contractors who paid their IR35 tax.

Estimates show that umbrella company contractors pay, on average, £10,000 a year more in tax than those who use limited companies. They pay around £20,000 a year more than those who are in offshore umbrella companies.

Estimates show that there are 200,000 UK contractors in umbrella companies. That means that the Chancellor gets £2 billion a year more tax than he used to get if those umbrella company contractors were still in limited companies.

Contractors group, IPSE, claimed that the IR35 tax was a failure because it only brought in £12m a year.

However, they forgot to point out this extra £2 billion a year that the Treasury has been getting from contractors who were inside IR35 but went into an umbrella company instead of paying the IR35 tax.

Travel and Subsistence Tax Relief

Estimates show that they could save around 5% of their income a year on tax relief on travel and subsistence expenses.

So, a contractor on £400 to £450 a day would save around £5,000 a year on tax and relief on travel and subsistence expenses.

So, UK contractors are £10,000 a year worse off in an umbrella company than they would be in a limited company.

However, they would have been £5,000 a year better off than someone paying IR35 or PAYE.

Disguised Contractors

How it works is that umbrella companies disguise contractors as permanent staff. Indeed, they pay PAYE.

However, the umbrella companies passed on the tax relief for travel and subsistence expenses for working away from the umbrella company’s offices at client’s sites.

The Labour Government set up IR35 to stamp out the practice where companies laid off people on a Friday from their permanent jobs and started again as contractors doing the same job.

This was, of course, a ruse to save tax.

The Government saw these ‘contractors’ as disguised employees, which, essentially, they were.

However, the IR35 tax caught more than just those fake contractors it its net. It also caught contractors who had been contracting for years, using limited companies, in its net too.

However, the Labour Government saw the extra money it was pulling in and decided that they didn’t want to ‘fix’ it.

The Tories and UK Contractors

Now, the Conservative Government, who in opposition had pretended to be the ‘friend of contractors’ and who promised to ‘look at’ IR35 again on behalf of contractors if they got elected, have shown themselves to be much worse than New Labour. They were satisfied with the their creation of IR35.

The Conservatives did as they had promised and looked at IR35 again.

However, they decided that, if IR35 was abolished, there was a danger that umbrella company contractors would leave their umbrella companies and start up limited companies again.

Damn right they would have!

Who pays £10,000 a year extra tax when they don’t have to?

The government saw this as a bad thing, though.

It was a no-brainer. Whoever thought that, in times of austerity and Government debt that the Government would hand back £2 billion in tax to people earning a couple of grand a week.

Chancellor Strengthening IR35

However, Chancellor Osborne went even further. He said that he was going to STRENGTHEN IR35 and hired 36 new IR35 Compliance Officers based in Croydon, Edinburgh and Stretford to get more tax from contractors.

The assumption was that it was limited company contractors that he was gunning for.

Umbrella Companies future seemed secure.

Umbrella Company owners fondly imagined that HMRC were in favour of them.

After all, the Government decided to keep IR35 because of the threat of contractors leaving umbrella companies and setting up limited companies.

The Conservative Government must like Umbrella Companies then, right?

Rosy Umbrella Companies Future

Umbrella Companies future seemed rosy.

Umbrella Company owners fondly imagined that HMRC, the Chancellor and the Treasury looked kindly on them.

As one told us “HMRC would rather deal with, and legislate for, a few hundred umbrella companies rather than several hundred thousand contractors”.

The umbrella companies extracted PAYE from their contractors after deducting tax relief on travel and subsistence expenses and sent large cheques, monthly, to HMRC.

If those contractors were in limited companies, HMRC would only get the tax in dribs and drabs and would have to wait till well after their year-end to get it.

Therefore, the Government and HMRC were happy to allow contractors to get that 5% extra in tax relief, weren’t they? Umbrella Company operators saw this as a sop to them.

Onshore Umbrella Companies and Tax Avoidance

They, and their marketing directors, saw offshore umbrella companies as tax avoidance and those who used them as tax avoiders.

They turned their nose up at them.

A part of that was sour grapes, though, as they would have rather have had those contractors themselves.

They saw themselves as on the inside, on the side of right.

It turned out that the Chancellor saw Umbrella companies as tax avoidance too and those contractors who used them as tax avoiders.

How that must have stung!

Disguised Contractors and Tax Avoidance

They were kidding themselves. Whereas IR35 was set up to penalise disguised employees, umbrella companies were setting up disguised contractors, pretending that contractors, who had their own clients, were employees and paying PAYE tax for them.

It was a ruse – a device to avoid tax.

They may not like that but that’s how the Chancellor sees them and their brollies, as the budget showed.

Now, umbrella companies future does not look so rosy.

Umbrella Companies Unique Selling Point

So what is umbrella companies future?

The Chancellor has removed their Unique Selling Point.

Now, umbrella companies future is not rosy. It is hard to see it as a growth industry now.

Will contractors pay a fee to umbrella companies every month just so they will do their admin for them?

The answer is that some might.

With umbrella companies future looking bleak, others will decide that it isn’t worth their while. They may look at changing their working practices and contracts to see if they can operate through limited companies again.

Limited Company Contractors Attacked

However, the Chancellor has attacked limited company contractors too and has taken the travel and subsistence tax relief away from them as well.

He is also taxing their dividends to make it not worthwhile, any more, for limited company contractors to pay themselves in dividends rather than salary.

So what options do UK contractor have now?

What options has the Chancellor left untouched?

What are the umbrella company alternatives?

Offshore Umbrella Companies Option for UK Contractors

Besides limited companies, which are less lucrative for contractors now, there are two main options.

Firstly, there are offshore umbrella companies where contractors can get 85% returns on their money or more.

For more information, or to apply, you should click on Offshore Umbrella Companies List

UK Contractors Blackest Day Ever – Was it?

UK Contractors Blackest Day

UK Contractors Blackest Day Ever

Yesterday was arguably UK Contractors blackest day ever. Only the day they set up IR35 in 1999 could rival it. IR35 did not affect the majority of UK Contractors, however, like yesterday did.

It was the blackest, blackest day for Umbrella Companies who can no longer claim tax relief for contractors on travel and subsistence.

Umbrella companies’ best ever day was the day IR35 came in. They sprung up after that, disguising contractors as permanent employees so that they could claim tax relief on travel and subsistence for them.

No longer!

Yesterday was their worst ever day and the umbrella company industry will never be the same again.

However, the Chancellor also attacked those using limited companies. It was UK Contractors blackest day too. Read on for the impact of yesterday’s cruel budget on contractors which we got from an expert source.

SUMMER BUDGET 2015: UK CONTRACTORS BLACKEST DAY

The Chancellor of the UK delivered his Summer Budget yesterday. Within this there are a number of matters that will affect contractors. So, the main changes that will have an impact are:

· First of all, they announced a change to the taxation policy on dividends. Previously there was an advantage for those operating a Limited Company to take dividends rather than salary. This was available at a saving of up to 12.5% (on payments up to £150k).

However, the changes in the Summer Budget mean that they will remove the Dividend Tax Credit from April 2016 and they will introduce a new Dividend Tax Allowance of £5,000 a year. New rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

· Secondly, they aimed the other impact at those contractors that are the sole employee of their own company (PSCs). Previously an allowance was available for those PSCs paying employers Class 1 National Insurance on ordinary salary payments up to £2,000.

Umbrella Companies Worst Day

In his Budget, Mr Osborne has now removed access to this allowance for those operating PSCs.

· First of all, a key fact of Umbrella businesses is the ability to offset expenses on travel and subsistence. This enables contractors to reduce their taxable income. It is one of the most widely adopted methods of tax planning in the contractor market.

After first being discussed in the March 2015 Budget Plan, it was announced that this relief is to be removed with effect of April 2016.

· Secondly, IR35 has long been a key area for both contractors and HMRC. It has been the subject of a great deal of scrutiny. Again, the Government have chosen to review this. Although no specific guidance has been given, the likelihood is that this is an area of planning that will be open to a reduced cross-section of the contractor community.

 

Umbrella Company Reviews – Offshore Umbrella Companies

Umbrella Company Reviews for Contractors

Umbrella Company Reviews

Contractors often ask us for Umbrella Company Reviews. We are happy to oblige.

There are two types of Umbrella Company. There are offshore umbrella companies and there are onshore umbrella companies.

The Umbrella Companies HMRC prefer are the onshore umbrella companies. That’s because they get more tax from them.

Tax Avoidance Measures

So, Offshore Umbrella Companies are tax avoidance – but legal tax avoidance. They allow the contractor to keep from 80% to 90% of his, or her, money earned.

Contractors choose an umbrella company or a limited company. The Limited company options returns more to the contractor than the onshore umbrella company. However, offshore umbrella companies return the most.

We have offshore umbrella company lists and onshore umbrella company lists on other pages on this website.

Umbrella Companies Explained

Many of the offshore umbrella companies operate from the Isle of Man.

Onshore Umbrella Companies allow contractors to lay some expenses off against tax. The top umbrella companies are the safe ones.

Contractors can claim travel expenses and overnight expenses against tax as well as a few other things like pension contributions.

Umbrella Company Reviews and recommendations

Umbrella Company Reviews offshore and onshore

Umbrella Company Reviews and Comparisons

With an onshore company you would probably keep about 60% to 65% of the money you earned. With a Limited Company it would be maybe around 75%. With the offshore companies you would keep from 80% to 90%.

There are also companies which operate like the offshore ones but are onshore. They allow contractors to still use their limited companies.

Sometimes, agencies try to steer contractors towards particular umbrella companies. However, the suspicion is that they get commission from doing this. This is illegal under the 2010 Bribery Act – but they still do it.

Working through those offshore umbrella companies is the most lucrative for contractors. Using umbrella companies like that will have returns of up to 90%.

Umbrella Company List

To find some of these offshore umbrella companies, and more umbrella company reviews, you should click on Offshore Umbrella Company List

Contractors who want to find moneymaking opportunities should click on Contractor Moneymaking