Contractors thought that umbrella companies would be short-lived. It was conjectured that the IR35 may be abolished or the PCG might become successful, paving the way for contractors to get back into forming limited companies. The speculation was that the government would ban umbrella companies. Managed service companies had already been forced to close down with the fancy now catching on with offshore and onshore schemes. It was generally surmised that very soon, the government’s next target would be the umbrella companies.
It was a common assumption by everyone, including the umbrella companies that the underlying motive of the government was to bring every contractor under the purview of the IR35 so that they ended up paying all the concerned taxes.
The government was wary of contractors using all the benefits such as claiming tax benefits against expenses (a facility offered to employees of umbrella companies) just as ‘employees’ do. Instead, they wanted them to pay tax just as any normal employee would, minus the benefits. This was how everyone thought umbrella companies would end.
How Umbrella Companies Could Be Done Away With
This could be accomplished by getting the professional contractors to win in the High Court and the General and Special Commissioners or by urging the Conservative Party to abolish the tax legislation IR35.
The contractors thought that the Conservatives may roll up IR35 and put it away when they promised to once again take a look at it. However, at the end, they decided to keep it.
A Revealing Point
There was indeed a very revealing point in the report after the government’s second look at IR35. The only reason that stood in favor of IR35 was the fact that if the legislation was abolished, the contractors would opt out of the umbrella companies and go back to forming limited companies on their own. This would deny the government a huge sum in taxes. The contractors little expected such a revelation.
The Government’s Message
The message from the government comes clear: they prefer that the contractors stay back in the umbrella companies rather than move into limited companies. The government has made some money from the contractors who paid taxes as per IR35 rules last year. However, as more contractors come under umbrella companies, the government would earn more in taxes (contractors can claim up to 5 percent tax benefits against expenses using a tax calculator).
The government, in effect, seems to be happy about the existence of Umbrella companies as it is easier for them to deal with these than a million freelancing contractors. It is estimated that the umbrella companies currently enjoy a £2.3 billion market share in the United Kingdom.
According to a survey conducted by Parasol, one of UK’s leading umbrella companies, it is estimated that of the 1.4 million contractors, approximately 200,000 are enrolled in umbrella companies, 406,000 run limited companies, 294,000 are sole traders and another 406,000 are on pay-as-you-earn (PAYE) tax system.
It seems that the future is bright for the umbrella companies as abolition of the IR35 is not in the government’s mind for the present. So far so good!