Guide to Choosing an Umbrella Company

Umbrella Companies make a variety of claims and promises. When you hear one that sounds too good to be true, it probably is! To entice trusting contractors, some Umbrella Companies make statements that are misleading and simply untrue, such as:

  • Higher net-pay
  • Protection from HMRC investigation
  • “HMRC Approved”
  • Lower fees than other companies
  • Cheap starter fees
  • “IR35 Compliant”
  • We “act as employer”
  • “Agency Recommended”

Let’s take a minute to consider each of these and clarify the facts behind the tantalizing fiction of these claim.

Un-receipted Expenses Can Get You In Trouble

Right now, you’ll find Umbrella Companies advertising up to 85% retention of your income. That sounds pretty good but not when you know what’s really going on. The way they do this is by encouraging you to claim un-receipted expenses or automatically adding an un-receipted meal allowance of up to £36 per day.

One way they get you to claim un-receipted expenses is by misrepresenting dispensations. Dispensations are expenses for which your Umbrella Company is not compelled to collect receipts. Dispensations give maximum dollar amounts for the most commonly claimed expenses; if the expense claim is under this amount, the Umbrella Company doesn’t need to see the receipt. For example, if the dispensation amount for hotel accommodation is £95.00, the company won’t need a receipt if you’ve spent less than £95.00.

But just because the Umbrella Company doesn’t need a receipt, doesn’t mean you don’t need one! Like it or not, if you’re ever contacted by the HWe, you’re going to need receipts to support your claims. If you don’t have them, you’ll find yourself in serious trouble.

Unlike those shady operations, we carefully follow the HMRC’s guidelines on expenses and won’t process un-receipted expense claims. We don’t require receipts for expenses covered by our dispensation, but we do perform random checks, so we may occasionally request to see your receipts. We make the effort to ensure that our contractors are compliant, so they can sleep well at night!

Umbrella Companies Cannot Protect You From HMRC Investigation

Some Umbrella Companies promise that when you use their services, you’ll be protected from HMRC investigation. First of all, why would they need to offer such assurances if they weren’t encouraging some dubious practices? Secondly, it’s simply not true—no one can shield you from an investigation.

At the end of the day, it’s your tax liability, and HMRC will pursue you to reclaim any underpaid tax. Indeed, they’ll require you to pay more than just the underpaid taxes; they’ll also hit you with penalties and interest. They don’t care that your Umbrella Company offered you bad advice—they just want the money you owe them!

No Company Is HMRC Approved

The bottom line: HMRC doesn’t “approve” Umbrella Companies. What they do is grant a dispensation, and all large Umbrella companies have dispensations.

Lower Fees Don’t Apply to You

Some Umbrella Companies advertise the fees they would charge a high-rate taxpayer. The thing is, you might not be in that high-rate bracket. If you earn less than £37,400 per annum, those low rates won’t be what you pay! Double-check the small print when you review an Umbrella Company’s charges to see what tax rate their advertised fees are based on.

Cheap Starter Fees Don’t Stay Cheap Forever

Some Umbrella Companies hook contractors by advertising low fees for the first few weeks or even no fees for the first month. Beware! These introductory fees frequently lead to a higher-than-normal fee once the promotional period ends.

All Umbrella Companies have to charge for their services. If they don’t collect fees or if their fees next to nothing, they will have to make their money another way that could be problematic for your company (e.g., by only paying you once a month even if they receive payment from your agency every week.). Visit our price page

IR35 Compliant… it’s irrelevant!

The IR35 rules don’t apply to contractors that operate through an Umbrella Company because your payments are processed through PAYE. The claim of “IR35 compliant” may sound impressive, but it’s completely meaningless!

Umbrella Companies Don’t Always “Act As Employer”

According to new legislation, Umbrella Companies must “act as employer” to their contractors. Indeed, a well-respected industry lawyer has suggested that in the next budget, HMRC will want Umbrella Companies to take on all associated employer responsibilities. Even so, Umbrella Companies do not always abide by current regulations to “act as employer.”

An Umbrella Company that doesn’t operate a holiday pay policy could still leave you at risk of the MSC legislation. Just because you’re paid through the PAYE system, this isn’t necessarily enough to give you the status of “employed.” Without holiday pay you could still be held accountable under the MSC rules as a self-employed individual.

Agency Recommended

Some Umbrella Companies pay recruitment consultants to send contractors their way. Though there’s technically nothing wrong with this activity, it clearly does not have the best interest of contractors in mind. When consultants are paid for referrals, they’ll more likely refer a contractor to the company paying them not necessarily to the best company out there.

It is also becoming more common for Umbrella Companies to contract with an agency in exchange for referral fees. When they do this, they’ve made a commitment to send their contractors to that particular company. The contractor has no choice; if they want a contract with a certain agency, they have to use the agency’s preferred Umbrella Company, regardless of service levels or personal preference.

These are surely practices that you, as a contractor, should be aware of and keep in mind.