An umbrella company is essentially an intermediary between you and the public sector body you contract for. You are employed by the umbrella company, which means IR35 is never an issue, because you pay PAYE/NIC on your earnings and the umbrella company handles all your specialist contractor accounting administration, including invoicing, tax, VAT and NIC, for a fixed fee.
Your pay is still based on your contract agreement; the umbrella will take care of invoicing and chasing your money for you.
Using an umbrella company is a practical way to deal with the new rules and also when starting with freelancing or contract work, especially if you are not sure if this kind of venture is right for you.
Working for an umbrella company allows you to remain with the public sector client and, if new to contracting, it allows you to test the waters without making the serious commitment of setting up as a limited company.
You can always consider a more permanent option, such as forming a limited company, further down the line if things work out for you and our sister company, Accountants4Contractors, can assist in that area.
For many existing contractors that are being forced down this route, this is the solution that may suit best.
Use the umbrella company to receive the ongoing fees from 07/04/2017 to comply with all the new off-payroll public sector. Retain the existing Ltd. company and utilise retained profits within the business to cover ongoing expenses. This Ltd. company can be set to ‘dormant status’ and fees controlled down at a low level to ensure that this makes financial sense.
How this works:
- The Umbrella paying existing income
- The Ltd. company to cover some expenses and be available to receive other revenue
- You have the flexibility to operate under the new rules, but leaving the door open to move between Public and Private sector.
- You will still be able to claim some costs and expenses through your existing limited company while also operating through an Umbrella, for example:-
- Committed expenses, such as contractual costs (if your mobile is on a contract). However, HMRC will expect that you do not renew such contracts when they end.
- Expenses searching for the next role – such as travel
- Accountancy fees
HMRC will not allow you to claim the expenses you incur directly in order to fulfil your Umbrella role, e.g. subsistence.