Umbrellas and IR35

FAQ: What is IR35?

The term IR35 came from the name of the press release from HM Customs & Revenue when they announced their intent to introduce legislation to address “disguised employment”.

What is disguised employment

This term is used when your relationship with the end client is similar to that of an employee. Its key impact is that HMRC will examine your agreement with the end client, and may consider your earnings to be salary. This means that tax and national insurance will be payable.

When does it apply?

Each contract is viewed on its own merit so it is important that you consider each contract and inform us of your IR35 status for each one. We can provide guidelines for assessing whether IR35 applies but the responsibility for ensuring that the correct status is applied lies with the contractor who understands the true reality of the relationship they have with the end client.

What are the indicators of disguised employment?

The contract is key and should reflect the reality of the situation and the relationship between contractor and end client. Within the contract, there should be the following features which suggest self employment rather than employment (and within IR35)

• Right of substitution – you have the right to send a substitute to undertake the work if you are not available
• Place and hours of work – are at your choosing
• Price – ideally should be a fixed price so that you have the risk of additional work if there are problems rather than working and charging by the hour
• Equipment – you provide your own kit and equipment rather than using the clients
• Accountability/Responsibility – you have freedom to control the work you do and are not under the direct supervision of the client

The IR35 status of each contract is a matter of fact rather than choice. It is important that the correct decision is made to avoid penalties and backdating of tax owed by HMRC later on. Each contractor is responsible for determining the nature of their contract with the end client for each assignment.

FAQ: What is an Umbrella Company?

If you are a contractor supplying personal services within IR35, you have two choices for trading:

Limited Company

Set up your own limited company, have your earnings processed as payroll and claim tax relief for the expenses of running the company. Setting up a limited company involves additional costs and responsibilities.

You will be required to produce and file a number of documents
• To Companies House: annual return, statutory accounts
• To HMRC: annual P35 payroll declaration, statutory accounts, corporation and self assessment tax return

You will still be subject to PAYE and NI on your earnings based on 95% of your income but you will also be able to claim travel and accommodation costs. You may benefit from the flat rate VAT scheme.

An accountant will typically charge from £75 – £95 per month to prepare your accounts and file your tax returns. If you choose this option, please contact our sister company at info@candmservices.co.uk who will discuss this with you.

or Umbrella Company

Join an umbrella company which will process earnings and expenses in a tax compliant manner, providing you with a P60 at the end of the tax year.

An umbrella company gives you benefits both in terms of cost and convenience:
• No additional forms to complete or accounts to submit.
• You are eligible to take advantage of a full range of benefits such as insurance cover, IFA advice and stakeholder pensions.

Many contractors choose this route because it gives them a tax efficient and low admin alternative to setting up a limited company.

FAQ: What is a PAYE Umbrella?

All umbrella companies are PAYE umbrella companies.

This means your earnings are processed as salary and PAYE, employees and employer NI deducted and paid over to HMRC.

FAQ: How do Umbrella Companies Work?

See below for an overview of this process: when, what and who

Example for weekly paid contractors

Note:

• Late timesheets and expense forms will miss processing and be carried forward to the next period.
• Payments to contractors are conditional on the invoice being paid by the agency.
• Expenses not claimed in accordance with our expenses policy will not be processed.

FAQ: I have other contracts/business so I must be outside of IR35, right?

Not necessarily!

The fact that you have more than one contract/business will reduce the strength of any potential disguised employee relationship but, ultimately, you need to review your IR35 status on a contract by contract basis.

This means that you may be caught by IR35 when working on one contract and not on another due to the nature of the working arrangements.

To check whether your contract means you are a disguised employee, read the FAQ above – What is IR35?