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A Contractors’ guide to using an Umbrella Company

04 October, 2010

When moving from permanent employment into contracting, the choice of an Umbrella Company looks very attractive as they provide stability for contractors that regular contracting cannot. Contractors need not concern themselves with office procedures or looking for the next contract, and therefore Umbrella Companies offer stable earnings with a flexible schedule.

Before selecting an Umbrella Company do some research, read some of the contractor forums and get a feel for which company best suits your particular needs. Remember good personal recommendation is always the best, so ask contractor colleagues to recommend an Umbrella Company.

If a company says that it is HMRC approved, be very careful. The HMRC does not approve any company - it only means that they have a dispensation to simplify the way expenses are reported. Umbrella Companies have negotiated dispensations with HMRC and this is a streamlining of administrative processes and in some areas eliminates the need for submitting receipts.

There are some companies that claim to have dispensations and encourage contractors to claim for un-receipted expenses. This is a particularly dangerous practice and a good Umbrella Company will claim only for genuine expenses and require that all receipts are kept regardless of any dispensation. Umbrella Company employees are entitled to claim tax relief on expenses incurred in the course of the contract - these include undertaking travel, subsistence and overnight expenses. The HMRC requires that receipts are kept for 5 years.

The wording ‘IR35 compliant’ is another term that some Umbrella Companies use. The IR35 is irrelevant for Umbrella Company Contractors, as they are taxed as employees under normal PAYE conditions.  

A well-structured Umbrella Company provides a complete professional employment service that will include:

  • Contract of employment
  • Guaranteed hours of work
  • Invoicing and timesheet management
  • Dedicated account managers
  • HR support that includes grievance or disciplinary procedures
  • Commitment to customer service
  • PAYE and National Insurance contributions
  • Statutory HMRC notifications
  • Issuing of invoices
  • Collection of payments from clients/agencies
  • Payment direct to personal bank accounts

Consider the following before signing a contract

  • How many contractor clients do they have?
  • How long have they been operating?
  • Which agencies do they work with?
  • Have they been assessed for compliance with tax legislation?
  • What is the fee structure of the Umbrella Company, ie. do they charge a weekly or monthly fee, or is the fee based on a percentage of gross invoice value?
  • What is the timing of payments ie. how long after submitting a timesheet is payment made?
  • Will you be covered by insurance ie. Professional Indemnity Insurance, and Employees and Public Liability cover?
  • Does the company offer a contributory pension scheme? This is one of the few remaining tax breaks available to contractors
  • Will the company hold any funds for contingency reasons?
  • Are there any costs for joining or leaving the company?
  • Does the company have user-friendly IT programmes, ie. an easy to use computing system for timesheets, checking on the progress of salary payments and expenses and access to online help?

Finally, the Umbrella Company should be offering you a trouble free way to get your job done. The ideal Company offers to minimise risk, maximise return and does its best to make life as a contractor as easy and straightforward as possible for you.

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