Umbrella Company And IR35- A Fundamental Guide | Easy ...
The use of an Umbrella company by contractors increased rapidly following an Inland Revenue (now HMRC) issuing bulletin IR35. In basic terms, this bulletin introduced proposed changes to tax law that decreased tax avoidance by men and women that labored as contractors rather than being a worker of the company they worked for. The bulletin has turn out to be widely known as IR35 and relates to Contractor tax.
The introduction of the rules detailed in IR35 decreased the scope for higher paid employees of businesses to set up as contractors (still working for exactly the same company) by setting up limited businesses and drawing little salaries and taking most of the revenue as dividends, decreasing their tax and National Insurance payments. Effectively, IR35 set up a series of tests to figure out whether a person is really a genuine contractor or a disguised employee of the company they?re working for (client company).
Each time a contractor agrees a contract having a client company, whether it is directly or via a hiring agency, you will find risks that it could fall within the scope of IR35 and also the contractor might be treated for tax purposes as being an employee of the client company.
This is where the Umbrella company comes into play. The contractor is (or becomes) an employee of the Umbrella company who will invoice the client company (or hiring agency) for the hours worked and then any legit expenses accrued. On payment being received by the Umbrella company they will compensate the contractor, subtract and account for tax and National Insurance. The expenses will probably be taken into account when figuring out the pay, tax and National Insurance for the contractor.
Contractors that acquire work via hiring agencies have slightly different arrangements. There are additional steps in the process that entails the agency is invoiced by the Umbrella company, the agency bills and is paid by the client company and then the agency subsequently pays the Umbrella company.
Contractors working for an Umbrella company can show that they?re certainly not an employee of the client company and therefore don?t fall foul of the IR35 rules. The Umbrella company bills the contractor a fee for the provision of its services and this really is an allowable expense for tax purposes.
An illustration of just how a contractor is compensated via an Umbrella company works is best shown:
Contractors that don?t work through Umbrella companies need to deal with all the additional paperwork, deal with the invoicing and account to HMRC for tax and NI. Additionally they may face investigation pertaining to the breach of IR35 rules. Suspected breaches of IR35 rules are complicated and really expensive to fight.
Even if you effectively demonstrate that you haven?t breached the IR35 rules, you can not reclaim the costs you?ve accrued.
Source: http://www.easyscratchoffs-canada.com/umbrella-company-and-ir35-a-fundamental-guide/
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