Umbrella company

An umbrella company is a company that employs agency contractors who work on temporary contract assignments, usually through a recruitment agency in the United Kingdom. Recruitment agencies prefer to issue contracts to a limited company as the agency liability would be reduced. It issues invoices to the recruitment agency (or client) and, when payment of the invoice is made, will typically pay the contractor through PAYE with the added benefit of offsetting some of the income through claiming expenses such as travel, meals, and accommodation.

Umbrella companies have become more prevalent in the UK since the British government introduced so-called "IR35" legislation that creates tests[1] to determine employment status and ability to make use of small company tax reliefs. According to criteria set out by the UK Department for Business, Innovation & Skills, there are an estimated 4 million temporary workers in the UK, of whom 1.56 million are "classed as being in a management or senior official role, a professional occupation or an associate professional and technical occupation." It is estimated that 14% of the UK's professional contractors are currently managing their business by working through an umbrella company.[2]

Structure

An Umbrella Company [3] processes timesheets received from the employee/contractor, then issues an invoice to the client for payment.[4]

Flowchart of Umbrella Employment

An umbrella company is an employer and therefore all contractors working with them should sign a Contract of Employment,[5] also referred to as a contract of service. This contractual arrangement establishes the rights and obligations in such matters as maternity pay, sick pay and employment protection. Contract and Employment law is complicated and there is a substantial body of case law which provides guidance on what constitutes a contract of service.

The umbrella company provides payroll services on behalf of the contractor and bills the agency (who in turn bills the client) for work completed by the contractor. The umbrella company provides all social contribution and tax payments (in some countries also "PAYE, Pay As You Earn") and equivalents and National Insurance returns on behalf of the contractor.[6]

The client is effectively the company for whom the contractor works. This may be within any industry and across all levels of employment. The client often elects to use contractors as it affords them the ability to temporarily augment their staff or capability without the burden of the legal requirements associated with permanent employees (PAYE, NI, sick pay, insurances etc.). Using contractors also facilitates special skills and typically provides the advantage of a broader skill set, as the contractor has typically worked many companies and organizations during prior contracts.

The agency, if involved, performs the recruitment process on behalf of the client. Some agencies will provide a PAYE scheme as part of their offer. This alleviates the requirement for the umbrella company but requires additional capability within the organization including professional accountants and adherence to fiscal laws. Most agencies elect to utilize an umbrella company.

The contractor or employee of the umbrella company completes the actual work, completes a timesheet and submits this (typically via fax or secure web portal) along with any expense claims to the umbrella company.

Expenses and taxes

All umbrella companies use the same PAYE calculations to ascertain how much tax should be paid. The only difference between umbrella companies will be the margin that they retain and the schemes they run.

Some of the most common "allowable" expenses include: mileage & general travel expenses, hotel and accommodation expenses and professional subscriptions. Food and subsistence is rarely allowed to be claimed, as it is HMRC's opinion that you would eat regardless as to whether you are working or not. The exception to this rule is if you were staying away from home as part of the work.[7]

As an employee of an Umbrella Company you may be entitled to claim assignment related contractor expenses,[8] if you engage in a number of assignments, based at different workplaces, during a single period of employment. If you know you will only work on a single assignment during your employment, your workplace automatically meets HMRC's definition of a permanent workplace and therefore travel and accommodation expense claims are not permitted.

The 2008 HM Treasury pre-budget report[9] reported on the consultation on the use of travel expenses in conjunction with being employed via umbrella companies.[10] The document questioned the validity and fairness of allowing business expenses in this form suggesting that an overarching employment contract was not a form of employment that allowed travel and subsistence expenses. HMT decided that the legislation would remain as is but suggested additional HMRC policing would be carried out to reduce cases of non-compliance. HMT issued the results[11] of the consultation in December 2008.

Supervision, Direction and Control (SDC) [12] came into effect on 6 April 2016 as a way of limiting the number of umbrella contractors being able to claim travel and subsistence expenses. As a whole, tax relief is not available for home-to-work travel and related subsistence to workers in a permanent role. This is, as of April 2016, the same for contractors working through umbrella companies.

Benefits

Umbrella companies broadly provide several benefits to contractors:

a) Standard set of Statutory Payments like Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Holiday Pay etc.   
b) Other employment life style benefits like Clinical counselling, Legal Support, Dependent Care, Critical incident support [13]
c) Minimum admin and paperwork
d) Claim tax relief on allowable expenses if you are not subject to Supervision, Direction and Control [12]
e) The Umbrella Company is your employer so IR35 is not relevant to you [14]

Charges

Umbrella companies normally keep a part of the income or charge a margin for processing contractors' payroll and for some umbrella companies it will go towards contractors insurances. In France,[15][16] Belgium and Sweden, it is usually a percentage of the invoiced amount. In the UK, it is mostly a fixed weekly amount.[17]

The American professional employer organization PEO (Professional Employers Organization) offering co-employment for small companies.

Notes
  1. "Basic principles: how to work out when the legislation applies - flowchart".
  2. "The size of the UK's umbrella contractor workforce". Retrieved 2013-02-15.
  3. "What is an Umbrella Company? (2021)". FindYourUmbrella.co.uk. Retrieved 25 January 2021.
  4. "How Umbrella Companies Work". Dolan Accountancy. Dolan Accountancy. Retrieved 21 September 2017.
  5. "Over-Arching Contracts of Employment". ContractorUmbrella.
  6. "How An Umbrella Company Calculates Your Pay". Quad Management. Quad Management. Retrieved 18 November 2020.
  7. "Umbrella Company Expenses". ContractorUmbrella. ContractorUmbrella. Retrieved 21 September 2017.
  8. "Guide to Claiming Expenses".
  9. http://www.hm-treasury.gov.uk/bud_bud08_repindex.htm
  10. http://www.hm-treasury.gov.uk/consultations_and_legislation/travel_expenses/consult_travel_expenses.cfm
  11. http://www.hm-treasury.gov.uk/consult_travel_expenses.htm
  12. "What is Supervision, Direction and Control? (SDC) How does it affect expenses for contractors?".
  13. "Umbrella Company Benefits".
  14. "Top 10 benefits of Umbrella Companies in 2021".
  15. "PORTAGE SALARIAL : A LEGAL WAY OF ENABLING PROFESSIONALS WORKING INDEPENDANTLY [sic] TO PROVIDE THEIR SERVICES". Links-consultants.com.
  16. "L'Umbrella company anglaise et la société de portage salarial française : des fonctionnements similaires". ITG.fr.
  17. Arvas, Fredrik. "Umbrella Companies in Europe". MBA Dissertation. Henley Business School, London, UK. Retrieved 9 July 2012.

References
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