Umbrella companies are preferred by many contractors who are new to the profession to avoid the hassles of invoice submissions for tax purposes and insurance contributions. Though umbrella companies help to share the administrative tasks of a limited company, it does not mean that the entire control of the finances of the limited company is passed over to them.
An Umbrella Company – How Does It Work
An umbrella company basically acts as an employer to contractors who are self employed and work for fixed-term contracts and who are contracted through recruitment agencies. The umbrella company, on the contractor’s behalf, invoices the client, collects payments on his/her behalf and makes the necessary insurance and tax deductions. They also charge a fee for their services and pay the balance as salary to the client. It is important that the contractor should receive a pay-slip similar to the one issued by the company for which he/she is contracted.
The advantage of claiming expenses for travel, meals, accommodation, etc., for tax benefits, is also available.
Umbrella companies have become popular over the last decade and the introduction of the IR35 is seen to be a contributory factor for this. IR35 was introduced in April 2000 by the government to ascertain the self employed status of those individuals who applied for tax benefits under specific schemes of self employment. The impact caused by implementation of IR35 was notable and it forced the closure of some businesses. Investigations of IR35 are known to be laborious and time consuming. Umbrella companies were formed mainly to remove the accompanying stress.
Limited Company or Umbrella Company
When it comes to choosing between opening a limited company or an umbrella company, sufficient research should be conducted into the working of both the options before making a final decision. It is important to investigate as to whether the contracts and other working practices fall under the purview of IR35. If so, an umbrella company may be a good choice for the contractors. It is also worth engaging an umbrella company for short-term contracts or if an individual is looking for simple solutions.
Advantages of Using the Services of an Umbrella Company
Listed below are some of the advantages of making use of the services of an umbrella company:
- The contractor can concentrate on the job at hand and not take up the hassles of running a limited company.
- All the accompanying tax and accounting burden is looked after by the umbrella company.
- It saves time for short-term contracts.
- It is easy for the contractor to administer timesheets (weekly or monthly) to the umbrella companies. Most of their operations are online and streamlined.
Disadvantages of Using the Services of an Umbrella Company
Listed below are some disadvantages of using the services of an umbrella company:
- There is no control over the payment process.
- The contractor is an employee and the umbrella company does not support any future business plans of the contractor.
- The contractor has to entrust money to the umbrella company to make tax and insurance payments on his/her behalf and also make sure that they are paid efficiently.
Once a decision is made to engage the services of an umbrella company, choosing the right one is important. References are perhaps the best way to know more about an umbrellas company. It is also a good idea to do some research on the Internet about existing umbrella companies to find one that is most suitable for the contractor.
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