Does IR35 Apply to Umbrella Companies?

If you’re a contractor interested in using an umbrella company then the chances are you’re going to come across something called IR35.

IR35 is one of those vague tax rules that no one really understands the implications of yet (mainly because it’s open to interpretation). But while the UK comes to grips with how IR35 is being interpreted by the tax authorities, we’ve written a post to help you understand it as best you can.

What is the purpose of IR35?

The easiest way to describe the purpose of IR35 is that it exists to determine whether someone is a genuine contractor or an employee. This difference is very important when it comes to calculating the amount of income tax and national insurance that they should pay.

Also known as the ‘intermediaries’ legislation’, IR35 is a set of tax laws designed to help make that distinction. The government implemented it in early 2000 as part of its plan to stop anyone avoiding paying income tax and national insurance for their work. Specifically, this was happening when contractors left work on a Friday, set up a limited company (which provides tax benefits for its owners) and returned to work as a contractor on the Monday.

This was a lose lose situation for government tax revenues. However since its inception IR35 has evolved into a wider program not just of tax reclamation (which many argue is justified) into one of actively generating further tax revenues by targeting legitimately self-employed workers who perform a role similar to those of an employee.

Employees vs contractors

If you work as an employee for a company, you are subject to certain levels of national insurance and income tax. The argument is that as an employee you’re taking a low economic risk and therefore you don’t need ot be encourage through tax breaks to invest your money in the economy.

As a result, your employer calculates and takes your tax directly from your salary as pretty straight forward rates.

On the other hand, contractors with limited companies are encouraged to invest back into the economy by paying lower taxes on their company profits. Lower taxes is their reward for being entrepreneurial and creating wealth in the economy.

Despite doing roles that are often similar to an employee, contractors as the owner of a limited company can split their income between a salary and dividends, which are taxed at a lower rate.

The argument is that as contractors have zero job security, zero employment benefits and run their own business, they should have access to the tax beneficial Limited Company structures that business owners use. However in gaining access to these structure, HMRC would argue that contractors are able to pay less tax.

The argument then between employee and contractor is one that HMRC sees as a potential winner for tax returns, making IR35 (and classing all contractors as employees for tax purposes) as a weapon in their arsenal to pump us tax revenues.

How does IR35 work?

There isn’t a definitive way of determining whether you should be classed as an employee, a limited company or a sole trader in the eyes of IR35. This is because HMRC are not quite sure themselves (as recent court cases have shown even HMRC will argue against their own advice if it is to their financial advantage).

However history shows there are a few key factors that HMRC considers when determining a person’s IR35 status. These can include how much control you have over where, when and how you work. Or if you can send a substitute to complete your work for you. Another factor is the expectation of the work and what you are obliged to do.

Companies expect employees to work when asked and employees expect the company to give them constant work. Self-employed people expect payment for their services but don’t expect to receive any further work after they complete a specific amount. Another important way of showing self-employment is through your ability to choose work. This could be turning down work or picking up any more work outside of the initial contract.

As you can tell these are all factors that are open to interpretation. It’s highly unlikely that a Doctor would send someone else to perform their operation or wear anything they like in the operating theatre.

There are many other identifiers HMRC will consider, including who provides the equipment for the job, whether you have several clients and even how often a client provides you with work. According to one clause, HMRC argues that “where work is regularly offered and accepted over a period of time a continuous contract of employment may be created.” In essence, if you have a good client, HMRC might deem you their employee simply because they don’t want to work with anyone else!

If you want to make sure that you are fully IR35 compliant, it’s important to make sure that your contracts show that you are a ‘business in your own account”, factoring in the realistic behaviors of your industry.

This could be demonstrated by things like having your own office, a company website and taking holidays whenever you want. In contrast you shouldn’t do things that make you look like an employee e.g. allow yourself to be managed by an employed manager in a team or attend work at set hours.

How does IR35 affect umbrella companies?

With IR35 so open to interpretation (and HMRC changing its definition by the week) it’s easier to side step the farcical situation entirely by using an Umbrella Company.

When you complete your work through an umbrella company, you are treated as an employee and are paid through the PAYE system. This means that IR35 won’t have an effect. IR35 is designed to catch out ‘disguised employees,’ and if you operate as an employee of an umbrella company this ceases to be a concern.

Umbrella companies are a very useful way for people to carry out contract work without the hassle that can come with starting a limited company or being a sole trader. Umbrella companies manage all the paperwork and administration of taxes. They will also deduct them from your pay, so you don’t have the worry. In return you pay a percentage of your earnings to the umbrella company for using their services.

In the past, some umbrella companies have tried to market themselves as being ‘IR35 compliant’ to try and persuade contractors to use their services. This phrasing can be misleading simply because a more accurate phrase would be that umbrellas are “IR35 irrelevent”.

Another way to describe this situation is being ‘outside IR35’ which may also be used in marketing for umbrella companies. As umbrella companies meet this criteria by nature, selling the idea of IR35 compliance can make it sound like an extra perk rather than the standard.

Is an umbrella company right for you?

All in all, umbrella companies make it easier for contractors to work for themselves. As well as eliminating the hassle of IR35, they provide invaluable statutory benefits like holiday pay, sick pay and paid maternity or paternity leave. However, they also vary in the fees they charge and the other perks on offer.

At Umbrella Supermarket, we make it easy to compare umbrella companies and find the best for you. Use our umbrella comparison site to get quotes from leading providers in under two minutes.

Would you like more information on Does IR35 Apply to Umbrella Companies??

Explore More Resources

using an umbrella company

Beginner’s Guide to Using an Umbrella Company

If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.

After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.

 

PAYE and Umbrella

Guide to PAYE vs. Umbrella

PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.

To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.

Holiday Pay for Umbrella Contractors

Complete Guide to Holiday Pay for Umbrella Contractors

One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.

To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.

umbrella company

When Shouldn’t You Use an Umbrella Company?

Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.

One way that contractors can work is through an umbrella company.

Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?

To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.

umbrellas

The truth about HMRC approved Umbrella Companies

There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.

After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.

However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.

To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.

umbrella company costs

How Much are Umbrella Company Costs?

If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.

To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.

 

Choose Between PAYE or Umbrella

How to Choose Between PAYE or Umbrella

Every contractor faces the decision between PAYE or umbrella, but how do you know which is the best option for you?

After all, PAYE and umbrella both have key differences, meaning contractors should do their research to find the best path for them.

Thankfully, Umbrella Supermarket is here to help. In this guide, we take a look at PAYE vs. umbrella, explaining what you should know before making the all-important decision.

date rates vs hourly rates

Should contractors choose hourly or daily rates?

There are many decisions a contractor must make in their career. One important one is whether to charge daily rates or hourly rates.

Each option has its own pros and cons and will have a different impact on contractors.

Therefore, it’s important that every contractor does their research to find out which option is best for them.

In this guide, Umbrella Supermarket looks at hourly rate vs daily rate and the benefits and drawbacks of each, to help every contractor find the best route forward for them.

 

public sector private sector contractors

How to choose between public sector vs. private sector for contractors

Every contractor must make the decision about whether to work in the public sector vs private sector.

Operating in the public or private sector can have a big impact on the contractor’s career, including on what types of contracts they will work on, who they will work with to whether they will fall under IR35.

This is especially true since changes to IR35 legislation were rolled out in April this year which have had a significant impact on private sector contractors.

If you are debating between contracting in the public sector vs private sector, Umbrella Supermarket are here to help. In this guide, we outline the key differences between the public and private sectors and what effects this will have on contractors.

contractor options

Complete Guide to Contractor Options

Contracting has become an increasingly popular way of working in recent years. If you have decided that the time is right to begin your contracting career, one of the first questions you will ask yourself is how you will operate.

How they operate is one of the main decisions contractors must take which will have a big impact on your day-to-day contracting life.

After all, there are a number of ways you can work, including through an umbrella company or by being self-employed.

In this guide we look at umbrella company contracting vs self-employed contracting and the main advantages and disadvantages of each, to help you make the right decision.

 

Statutory payments

Statutory payments for contractors explained

Contractors can choose to work on a self-employed basis through their own limited company, or through an umbrella company as an employee of the provider.

Thousands of contractors choose the umbrella route. After all, there is a range of benefits to operating under an umbrella company, including receiving statutory rights.

If you are considering becoming an umbrella contractor in 2021 and want to know more about statutory payments for umbrella contractors, Umbrella Supermarket has put together this handy guide outlining everything there is to know.

comparing umbrella companies

What To Look Out For When Comparing Umbrella Companies

Working through an umbrella company has become an increasingly popular option for contractors in the UK.

An umbrella company makes contracting easy and hassle-free for contractors, saving them headaches on everything from tax, payroll, insurance to dreaded IR35.

However, with are so many umbrella companies out there, choosing the perfect one for you is no easy task.

To help, Umbrella Supermarket have put together this handy on what to consider when comparing umbrella companies, so you can find the best one in 2021.