There are many good reasons why a contractor might consider using an umbrella company to act as an intermediary between himself and his client.
But how does it look from the other side of the fence? Why should you, as a business, employ contractors via an umbrella company rather than dealing with them direct?
What is an umbrella company?
As suggested above, an umbrella company looks after the relationship between a self-employed contractor and the client that they are temporarily working for. Although the contractors are still running their own business, they actually sign an employment contract with the umbrella services provider.
A good PAYE employment-based umbrella company will collect payment for a contractor’s services from the client, pay their PAYE tax and national insurance, and then pass the remainder on to the contractor, minus a small fee.
The umbrella company should make sure that the contractor is fully HRMC compliant, while also guaranteeing him full employment rights and claiming any working expenses that he is entitled to.
Why should a business use an umbrella company?
The advantage for a business when dealing with an umbrella company rather than directly with a contractor is that they will be going through an established, reputable company that is designed to be transparent and compliant with all current Inland Revenue requirements.
Although most self-employed contractors are entirely honest, paying them via an umbrella company ensures that your business will not inadvertently get caught up in any kind of tax avoidance scams.
What jobs might you use an umbrella company for?
Any temporary contractors that your business might employ might best be paid and contracted via an umbrella company. This could include providers of essential utility services like plumbers, electricians or repair workers. It could also include IT specialists, graphic designers, casual labourers and temporary or seasonal shop and office staff.
Another advantage of employing these contractors via an umbrella company is that if you are unsatisfied with their work, there is an impartial third party between you and them that can mediate if necessary.
Are there any drawbacks to using an umbrella company?
Some small businesses might prefer the informality of dealing directly with a contractor, but really there are no disadvantages for a business to use an umbrella company. It doesn’t cost the client a penny more, and both parties know that they are legally compliant, whatever the nature and duration of the contract.
Working for an umbrella company ensures a contractor will never be caught out under IR35 legislation, which was introduced by the UK government in 2000 to tackle tax avoidance by bogus freelancers.
If a contractor is working for you on a long-term contract, it may be questioned whether he or she is in fact an employee of your business and just posing as a freelance contractor to take advantage of certain tax concessions. Going through an umbrella company removes any doubt for both parties and ensures your business is not caught up in any lengthy HMRC investigation.
Over 200,000 contractors work through umbrella companies in the UK. They are seen as the most secure way of working on a freelance basis, and the advantages to businesses are equally strong. Ultimately, umbrella companies would appear to be a win-win situation for all concerned.