All umbrella companies have to work in exactly the same way and the only difference in take home pay between one and another will be any difference in their margin. But no, I hear you cry, if you type ‘umbrella company’ into Google, you will be greeted by all sorts of different claims – 100% HMRC compliant, 90% take home, extra £1000 per month against tax etc. etc. So surely all umbrella companies can’t be the same?
If you follow the, invariably, paid ads you will be taken into a world of very basic websites which give very few details as to how you will manage to pay virtually no tax, but have reassurances that their offering is ‘QC approved’. So, let’s break down all these claims: ‘HMRC approved’ – another quick Google search will take you to HMRC’s own website which states, quite categorically: HMRC never approves tax avoidance schemes.
Sometimes you will be led to believe that the scheme has been approved because it has been given an SRN under the DOTAS rules, but all this really means is that the promoter has complied with his legal obligations to tell HMRC about an avoidance scheme. It does not mean that HMRC has approved the scheme or that you can rely on it.
So ‘90% take home’. Let’s take a moment to think about it.
The basic rate of income tax in the UK is 20%; the basic rate of corporation tax is 20%, so that doesn’t stack up! You also have to bear in mind that the scheme provider will take a cut – usually around 8% – so your contribution to the Government’s coffers will be about 2%. The types of scheme that offer this sort of return will usually use some type of loan scheme which has no commercial rationale and has been devised for no purpose other than to avoid tax.
Again, if we refer to HMRC’s website on this subject they say. Tax planning to be wary of:
· It sounds too good to be true.
· Artificial or contrived arrangements are involved.
· It seems very complex given what you want to do.
· There are guaranteed returns with apparently no risk.
· The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
You may say that HMRC are bound to say this sort of thing to scare people away from tax planning, but in 2014, new legislation is being introduced which will give HMRC unprecedented powers. They will be able to demand underpaid tax, interest and penalties from users of schemes, which haven’t been tested in court using the same mechanism as those that have.
The Offshore Intermediaries legislation will mean that a recruitment agency will be liable for PAYE and NIC obligations if they work with an offshore umbrella company. The Onshore Employment Intermediaries legislation will prevent umbrella companies from registering contractors as sole traders which avoids Class 1 National Insurance contributions and the General Anti Abuse Rule will catch anything else not covered by all the other new legislation.
The upshot of all this is that compliant umbrella companies will only pay you through PAYE, their margin will be around £25-£30 per week and that should be able to answer any question you ask. Before you settle for any one company, do your research – contractor forums are a great place to learn from other people’s experiences – HMRC can go rifling back through your tax affairs for years and they are not known for their understanding – current penalties go up to 200% of tax owed!