Thanks to the constant stream of legislation out of HMRC relating to the way contractors work there are now only two realistic options open to contractors for managing their income – working via their own limited company or working via an umbrella company. Both have their advantages. Limited company contractors who are directors of their own company have slightly more options when it comes to tax minimisation and expenses claims. They epitomise the ‘go it alone’ ethos of contracting that most people are looking for. However, they also end up facing an awful lot of paperwork and a great many complications when it comes to tax, intermediaries and IR35! Which is why more and more contractors are now turning to umbrella companies which still offer that ‘go it alone’ mentality but provide it under the cover of no paperwork and no hassles from HMRC!
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Indeed, ever since legislation was introduced to crack down on most of the contractor earnings vehicles out there – such as Employee Benefit Trusts and Managed Service Companies – the numbers of contractors opting for umbrella companies has ballooned to the point where they seem to be the default choice. There are now more than 200,000 contractors working via umbrella companies and that figure is growing year on year.
But how should a contractor who is new to the sector go about choosing an umbrella company? Firstly, they should start by doing their research – asking around, looking through forums online, checking industry reviews, talking to contractor accountants and recruitment agencies. Next, they should be prepared to ignore any hype. Most umbrella companies offer the same kinds of service at the same kind of rates. If you see an umbrella company claiming to offer a load of additional services or extra reductions in tax then you should probably steer clear of that one! Under PAYE there is very little wriggle room when it comes to tax liability so they’re either exaggerating or doing something a little bit naughty! The same applies to any claims they may make about contractor expenses. In fact, the rules on expenses are very strict and getting stricter by the year. In the end, the best way to judge them will be whether they seem honourable and truthful, whether they offer good service and how they both charge their contractor fees and get contractors their money. With that in mind, the following are some suggestions as to how to choose one umbrella company over another:
Do They Charge Unusual Fees? What Kinds of Fees
You should make sure you don’t go near any umbrella companies that are charging entry fees to join them, exit fees to leave them or which come with a minimum term that you have to stay with them (and consequently penalise you if you leave early!)
How Do They Charge You For Their Service?
Most of the decent umbrella companies will charge a fixed fee for their service, so you need to avoid any companies that link their fee to your contracting rate. This can end up being very expensive as their fee will go up as you start to earn more. These sorts of umbrella companies have purposely put in place complicated fee structures to tie themselves to your contract values. But why should you end up paying more just because you start to earn more? They are not having to do any more work so they should not be getting any more money!
No Receipts, No Expenses
Don’t listen to any umbrella company that states it is ok for you to make expenses claims without any receipts. If HMRC investigated your tax return and you did not have those receipts, then any claims would be disallowed and you would be liable for the outstanding tax.
Go With Established Companies
It may seem like obvious advice but it is best to go with an umbrella company that has been around for a while. There are a lot of new companies springing up everywhere and they simply don’t have the track record yet. If they get in trouble and fold, they could take some of your money with them!
If Something Doesn’t Smell Right, Walk Away
As mentioned above, there are a lot of claims flying around on a lot of umbrella company websites. It is very difficult to tell if a company is honest or ethical just from their website and a quick chat on the phone. But as a rule of thumb, if they are promising something (be it expenses, less tax or anything else) and you find yourself wondering how they are doing that, then chances are you should walk away. Once again, all umbrella companies are operating under the same rules and regulations as set out by HM Revenue and Customs.
Do You Know If They Are Compliant?
Obviously, you need to find out if they themselves are compliant and if they have been externally audited or reviewed. This is now quite common so it is worth checking. They will naturally tell you they are compliant as they want your business. But it is worth asking them what all their marketing claims are built around and whether they have had any dealings with HMRC. And always keep in mind, if there are any problems down the line it will be you in trouble, not them!
How Is The Service?
Lastly, it’s all about the personal touch. There are, nowadays, a number of fully automated umbrella companies out there and they are definitely cheaper. But that doesn’t mean they’re better. At some point you will almost certainly want to speak to a human being, particularly if you are new to the contracting sector. Before you sign up, call them and test out their service. Try asking them a few questions like – Will I have a dedicated account manager? How big is the support team? Are there service level agreements? See if you get one competent person who can deal with your questions well and who listens to you. If not, move on to another umbrella company!