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Umbrella Company Overview

21 September, 2010

Reputable Umbrella Companies provide stability for freelancers that regular contracting cannot. Freelancers need not concern themselves with office procedures or looking for the next contract, and therefore freelancing offers stable earnings with a flexible schedule.

Daily Subsistence Allowance is classified as one that does not have to be supported by receipts. The actual payment permitted by the Inland Revenue is £5 per night locally and £10 if abroad, ie. you may claim the amount for each night spent away from home while on the contract. All other expenses must be supported by receipts.

A Daily Meal Allowance are the actual meal costs that can be claimed while working at a remote location or when staying away overnight. The HMRC believes that “the cost of food, drink and accommodation is not in general an expense incurred wholly and exclusively for business purposes, since everyone must eat in order to live”.

Umbrella Companies’ Fees and Pay Deductions - The Inland Revenue controls all Umbrella Companies and the tax paid by freelancers is dependent on the individual’s personal tax code. The National Insurance contributions are a fixed percentage and the only other deduction that affect take home pay is the Umbrella Companies’ fees and whether or not they retain a portion for holiday or sick pay. Some Umbrella Companies charge on a percentage basis and are often prepared to negotiate particularly for the higher earners. A rough guide line of rates would be between £25 and £30 per week.  The advantages however are never becoming involved with VAT returns, company accounts, payroll matters, taxation, and other administration costs eg. the costly process of forming a company and later arranging for it to be dissolved.

Inland Revenue Special Dispensation - if granted means that some expenses may be claimed without having to record them on a P11D form and without producing the supporting receipts. While the dispensation allows for the Umbrella Company not submitting receipts; it does not mean that the freelancer does not have to keep them, as the law requires that all receipts are retained for a period of 5 years. The dispensation does not apply to individuals, but rather to the Umbrella Company’s accounting practices.

Umbrella Company Salary or Dividends Pay Option - this pay option could be more financially beneficial, however it is only legal to be paid in this manner if the contract is outside IR35 and payment is received through a personal Limited Company over which the freelancer has complete financial and administrative control. If the contract is inside IR35 and the freelancer is running a Limited Company payment can only be made through PAYE.

Contracts written to be IR35 friendly (outside of IR35) - effectively this can be done, however if a contract does not actually reflect working practices it will not be useful in the event of an IR35 investigation. If for instance you are paid a combination of dividends and minimum wages and the HMRC deemed it to fall inside IR35 all the underpaid tax would have to be paid back, a penalty could be levied and possible prosecution for tax avoidance could be pursued.

Part salaries paid to partners - under HMRC Section 660A this is not possible. The HMRC decision is based that on the fact that if the partner’s income is coming from the freelancers contract, then the partner has a right to the income and shares in the Company.

HMRC 24-month rule and changing Umbrella Companies - changing from company to company will not change the situation as the HMRC 24-month rule applies to the actual place of work and not the company being used. The workplace is defined as the permanent site at which 40% or more time is spent and the 24-month rule is quite clear that travel expenses between home and that place cannot be claimed for.

Expenses vs. Net Pay - monies spent on allowable business expenses will reduce the amount of tax paid.

Umbrella Companies and protection from HMRC investigations - In the event that the HMRC becomes aware of any fraudulent expense claims, it will investigate, and liability for underpaid tax along with penalties and charges will be applicable. Umbrella Companies can offer no protection against this procedure.

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