Umbrella company: Difference between revisions

An '''umbrella company''' is a company (a disguised employer that simply pays you on behalf of the company you work for) 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 asto thereduce agencytheir own 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<ref>{{cite web|url=http://www.hmrc.gov.uk/manuals/esmmanual/ESM3032.htm|title=Basic principles: how to work out when the legislation applies - flowchart}}</ref> 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.<ref>{{cite web|url=http://www.parasolgroup.co.uk/the-size-of-the-uks-umbrella-contractor-workforce/|title=The size of the UK's umbrella contractor workforce|access-date=2013-02-15}}</ref> IR35 places all the cost of employment on the agency worker, who pays both employers and employees national insurance, the apprenticeship levy and PAYE. Additionally, claiming expenses such as accommodation is not permitted. Because of IR35, many agency contract jobs are not economically viable, leading to staff shortages in many sectors <ref>|How to navigate contractor shortage |https://www.identifiglobal.com/news/how-to-navigate-the-contractor-shortage-created-by-ir35/42045</ref>

An umbrella company processes timesheets received from the employee/contractor, then issues an invoice to the client for payment.<ref name="How Umbrella Companies Work">{{cite web|url=https://www.dolanaccountancy.com/resource/umbrella-company-work/|website=Dolan Accountancy|title=How Umbrella Companies Work|date=14 August 2017 |publisher=Dolan Accountancy|access-date=21 September 2017}}</ref>

An umbrella company is an employer, and so each contractor working with such a company signs a Contract of Employment, also referred to as a contract of service. This contractual arrangement delineates thoseThe rights and obligations concerningwith regard to maternity pay, sick pay, and employment protection are outlined in this contract. A substantiallarge bodycorpus of case law providesoffers guidanceclarification on whatthe constitutes a contractdefinition of a service contract.

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 (including "PAYE, Pay As You Earn" in certain jurisdictions) and equivalents and National Insurance returns on behalf of the contractor.<ref name="How An Umbrella Company Calculates Your Pay">{{cite web|url=https://www.quadmanagement.co.uk/under-ir35-how-much-does-350-per-day-return/|website=Quad Management|title=How An Umbrella Company Calculates Your Pay|date=20 April 2020|publisher=Quad Management|access-date=18 November 2020}}</ref>

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.

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.<ref>{{Cite web|url=https://www.paystream.co.uk/helphub/umbrella/articles/umbrella-expenses-what-can-you-can-claim/|title = Umbrella Expenses - what can you claim?}}</ref>

The 2008 [[HM Treasury]] pre-budget report<ref>{{Cite web|url=http://www.hm-treasury.gov.uk/bud_bud08_repindex.htm|title = HM Treasury| date=15 March 2023 }}</ref> reported on the consultation on the use of travel [[expenses]] in conjunction with being employed via umbrella companies.<ref>{{Cite web|url=http://www.hm-treasury.gov.uk/consultations_and_legislation/travel_expenses/consult_travel_expenses.cfm|title = HM Treasury| date=15 March 2023 }}</ref> 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<ref>{{Cite web|url=http://www.hm-treasury.gov.uk/consult_travel_expenses.htm|title=HM Treasury|date=15 March 2023 }}</ref> of the consultation in December 2008.

Umbrella companies broadly provide two sets of 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 counseling, Legal Support, Dependent Care, Critical incident support <ref name="Umbrella Company Benefits">{{cite web|title = Umbrella Company Benefits| date=7 February 2017 |url = http://ganumbra.com/blog/?p=129}}</ref>