Contractor Umbrella Company

[John Diamond]

Contractor Umbrellas were first developed to service the IT contractor industry where individuals would be working for short contracts for a number of different employers and rapidly expanded to cover other sectors where individuals would work for more than one employer on short term contracts like supply teachers. This sounds remarkably like our sector if only for shorter contracts or individual jobs. The freelancer remains independant and free to negotiate and arrange jobs with any client he/she likes. If this method of employment was available when I started freelancing, I would be seriously considering it and I would want to be made aware that it was one of a number of options available to me.

 

Umbrella company explained

 

I'm looking to gather feedback from the industry professionals (rather than 'what the umbrellas say') who may have chosen to use an umbrella company as their method of employment.

 

Any views on the pros and cons would be appreciated and also any experiences, good or bad, would be useful.

 

Why would you choose NOT to use the services of an umbrella?

Are any employers currently requiring freelancers to be employed through a limited company as the only method of employment.

What has been the take up among our peers of this method of employment?

Are freelancers and employers of temporary staff in the industry, sufficiently aware of the services provided by and the benefits of umbrellas? Or am I just a bit behind the current trends?

Do you think self- employed freelancers in general are aware of the IR35 tax legislation and if they are complying fully with the requirements?

Do you think employers are doing enough to protect themselves when employing self-employed freelancers and the impact on their business if the HMRC does decide to pay a visit?

 

I have done some background research into contractor umbrellas and everything points to a win/win all round for the employer and the freelancer.

 

I look forward to hearing your comments.!

 

 

 

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[gordontech]

Do you want a PM in answer to these questions?

[david.elsbury]

I think your poll should be multi-choice, I know that for the work that I do there are at least 2 options that I could choose.

[bigclive]

Like anyone would actually confess to cash in hand payments on an open forum.

 

(Although cash in hand is extremely rare in my experience.) :(

[pritch]

As someone who works outside of the industry but uses an umbrella, I'd say the following:

 

Yes, they can save an awful lot of hassle. My umbrella do my billing for me, collect the payments, deal with the tax and NI and all that jazz. I'm also covered by their insurance. Effectively, it makes me an employee rather than someone who has to worry about running his own business at the same time as doing a 40+ hour a week job.

 

However, your take home pay as an umbrella employee isn't going to be as high as it would being truly self employed. A colleague has gone from umbrella to limited company, and his take home pay has gone up by hundreds a month.

 

I'm a reluctant contractor - I'm doing what I do right now because I couldn't find anything permanent. It looks like a permanent role with my current client is just around the corner, so I'm not fretting too much about it. If I was going to be contracting for more than a short time, I'd consider going self employed rather than through an umbrella.

[RumbleO]

I worked through an umbrella company last year.

The attraction was, as Pritch says, to have someone else do my billing, tax, NI and all that jazz, for a mere 28GBP per week admin fee. A bargain, I thought.

 

However, my employer - the umbrella company - has to pay their employer's tax and NI contribution, on what you - the employee - have earned them, so these amounts have to be deducted from your gross invoice to the client and the remaining moneys (less your expenses)then go in to the calculation of your pay and bonus, which is then subject to the normal employee deductions for tax and NI. (Your expenses are non-taxable and get added back in afterwards.)

 

So you find it costing nearer 150 GBP per week for your employer's liabilities.

 

The real killer is the expenses.

As an employee you are not entitled to claim many expenses that ARE legitimately tax-deductable by a self-employed person or by your limited company.

 

(e.g. work-clothing, use of space in your home for business, phone (you can only claim identifiable proven business calls,) and travel to "normal place of work" which as Pritch says about his colleague, amounts to hundreds per month. (Pedantically, if tax is 40%, I should say "amounts to forties per month" rather than hundreds, but it is a considerable amount.)

[Paul TC]

The following resource on the Professional Contractor's Group Website may be of interest.

 

PCG Guide to Freelancing Select the non-members download.

 

PCG membership is from both the IT and a wider industry base.

 

(Conflict of interest statement - I am a member) :)

[John Diamond]

Hi guys thank you for the feedback so far.

 

Gordon: please feel free to PM or post on forum - your discretion.

 

David: apologies for not having a catch all option for other answers. I thought I had most bases covered.

 

BigClive: reference to cash in hand on poll was a bit tongue in cheek. However, I do believe you can get cash in hand but the employer must make the deductions or the contractor should be declaring the income.

 

It is becoming clearer why 'freelancers' could be put off by this method of employment and there is facts and myths in the mix. It is my current judgement that if you choose the right umbrella company, understand the risks and rewards and comply with all the procedures then, for a lot of individuals, being employed by an umbrella company can be very beneficial method of employment for all parties.

 

References, introductions and research are key to ensure you and your employer/client don't get taken advantage of.

[kerry davies]

Hi John, haven't responded before as I have no personal experience but you cover most elements particularly about choice of umbrella. Only go with one that can be recommended by those with experience of their service over a certain period.

 

A friend got caught by one years back when they weren't that well known yet uses another today for all his business. He is in Graphic Design and works for very big and small companies both here and in the Gulf and he swears by the advantages. Just like all areas of business there are cowboys and chancers but the best are well worth considering for those at the other end of their career from myself.

 

If HMRC really do spend time on the self-employed, which is much more likely given the recent Head of Student Loans fiasco, it may well be the optimal solution to keeping them off ones back.

[bigclive]

BigClive: reference to cash in hand on poll was a bit tongue in cheek. However, I do believe you can get cash in hand but the employer must make the deductions or the contractor should be declaring the income.

 

Beacuse I'm far too honest for my own good I used to hate cash in hand when it was paid because my preference was to pay it straight into my bank account to make it easier for accounting. However, if times were tight it was too easy to use some of the cash right there and then.

 

Of course, if I'd realised then that there was going to be systematic government sponsored looting of banks and pensions I'd have just spent it all as it was and not bothered declaring it at all. I wouldn't have bothered saving money either.

 

From the descriptions of the Umbrella companies, it sounds like they are a glorified labour agency.

[Cheeseweasel]

I did some contract AV work through Randstad a couple of years ago (full-time AV tech at a university covering for a staff member who was on leave) and I was told that unless I had my own limited company I had to be paid through their preferred umbrella company. This resulted in a rather long-winded payment process whereby I had to complete a timesheet each week and various invoices were sent between Randstad, the umbrella company and the university (I still don't entirely understand the process, but I generally got paid each week as long as the guy at Randstad didn't forget to send my timesheet over (which must happened about 10 times in 6 months!).

 

In my opinion it was a bit of a swizz, as the umbrella company were taking out of my pay: their margin (fee for their service), employee's NI, PAYE (which was obviously minimal), and employer's NI. This equated to total deductions of 32% from my weekly wage of £420. I can see the benefits of using an umbrella company for "real" freelance work, but it just seemed unsuitable when I was working full-time for one company and had no expenses to speak of. It made me wonder what kind of deal Randstad has got going on with that particular umbrella company. Retrospectively I also wonder whether I could have chosen not to use it, but it certainly wasn't given as an option when I accepted the job - it was more a case of "here's the form for our umbrella company, that's how you'll be getting paid...".

[Ian Cunningham]

Big Clive- you're not the only honest one out there: I've always paid cash-in-hand jobs into the bank and generated an invoice for my books. This did have an advantage when I did get a tax audit / HMRC anal probe as I could honestly say I had no undeclared cash in hand income.

 

Not convinced by this umbrella company set up. It seems a good way to have the tax of an employee with the insecurity of a freelancer while losing all your Allowable Expenses as a Sole Trader.

 

One big concern would be whether their Employers Insurance and Public Liabilty Insurance would cover our industry (work at heights, rigging, electrical work, flying, rigging, pyrotechnics etc) - We all use specialist insurers for out cover, would the umbrella company understand this?

 

The Health and Safety "chain of command" would also be interesting as the Umbrella company, as your employer, would surely assume the Employers H&S responsibilites. If that's the case I can foresee a horrendous legal minefield between the client, umbrella company and the freelancer.

 

As to IR35 & IR56 (IR56 reagarding employment status is actually more relevant to "Sole Trader" freelancers) I'm well aware of the potential impact. The way most freelancers that I know would proabaly fall foul of a strict interpretation of the rules. I'm as guilty as anyone of not setting out formal rules of engagement with clients that would cement "self employed" status eg setting out the abilty to sub the job at my sole discression.

The flipside of this is ignorance or ignoring of these rules by many companies using freelancers- I'm not convinced that some understand the potential impact.

 

To be honest I can see little advantage in a Umbrella Company for most freelancers - the overhead of maintaining your books, insurance etc is not exactly onerous it seems an awful lot of money for someone to send your invoices for you.

 

Over the last eleven years I've built up good business (and personal) relationships with the companies I work with - I don't really want a 3rd party in that relationship with their own agenda, business practices and ethics. I know two actors and one sound designer that lost work because of the way their Agent handled a potential customer/client - I don't need that.

 

One nit-pick John: Maybe you should have disclosed that you are the MD of a crewing company in your original post, just saying...

[paulears]

Me too! I hate cash. The worst year of my life was when the HMRC inspected me - constant enquiries like "on the 14th November, you paid in £23.60 to your bank account- what was it for? (2 years previous). I'd decided that I'd fully account for cash and had answers for everything, but it was unpleasant. They also looked in detail at what you had bought. Why did you buy 20 pairs of white ladies pants from Marks & Spencer? So they really did investigate. Worse still, you cannot claim the accountants fees as expenses for an inspection - as in you can't claim the taxman's investigation as an expense!

 

I don't quite see how the umbrella company solution really works? You pay them a fee, but worst of all is you pay your own Class 1 contribution PLUS the employers contribution - that's a massive percentage of the total. It would be cheaper to start your own Ltd company with all the downsides of extra accountancy (even though my own accountant tells me that this would be bad for me - self-employment works better for me personally).

[bigclive]

It really sounds like these umbrella companies are just acting as middlemen and taking a cut off EVERYTHING including your tax! I'll bet they have a very complex contract that will exclude them from liability if there is any complex insurance claim.

 

It really does sound like "umbrella company" is just another name for a "labour agency". At least some of the labour agencies do financially advantageous things like exploitation of tax loopholes to boost your wages at the expense of the tax man. (Things like wages being paid as a 99 year loan to avoid tax completely!)

 

I've never used an agency. The only time I tried they offered me half the hourly rate of an electrician at that time and wanted to know who else I worked for so they could approach them for work. Needless to say I walked out and it put me off agencies for good.

[boac]

This...

Not convinced by this umbrella company set up. It seems a good way to have the tax of an employee with the insecurity of a freelancer while losing all your Allowable Expenses as a Sole Trader.

and this...

Over the last eleven years I've built up good business (and personal) relationships with the companies I work with - I don't really want a 3rd party in that relationship with their own agenda, business practices and ethics. I know two actors and one sound designer that lost work because of the way their Agent handled a potential customer/client - I don't need that.

 

I looked into umbrella companies a few years ago when I first heard about the IR35/IR56 issues. In the end I formed a limited company and this has worked well for me. It wasn't difficult and it wasn't expensive, considerably cheaper than paying an umbrella company to forget to send my time sheets or annoy my clients I reckon. It may work for IT contractors, but I can't see how it would work well for anyone in our line of work. For the employers yes, it would shift a lot of problems away from a crewing company say, but it would not be a good thing for the crew.