Why does an Umbrella Company exist anyway ?
Reading the forums on ContractorUK I came across Bob Jones recent article on the HMRC's concern over Umbrella Companies.
Bobs article is the first that I have seen that eloquently sets outsome answers to the question "Why does an Umbrella Company exist anyway?".
From the way Bob writes it is clear that a main reason an UmbrellaCompany exists is to provide a way of an employee moving from onetemporary site to another under an overarching contract ofemployment and be able to claim expenses and so reduce their taxburden, and increase their take home pay.
If you compare two workers that do four assignments in one year.Worker a) works for an agency and is paid paye. Worker B) works for anUmbrella Company and is paid paye and expenses.
In Workers A's case there are no expenses as HMRC see eachengagement as a separate and distinct employment, so just like anyemployee going to work each day there are no tax deductible expenses.
In Worker B's case there is an overarching contract of employment sothe workers is employed in one employment and works on 4 temporary worksites, hence the ability to claim expenses.
So this answers the question Why Does and Umbrella Company Exist ?, and it may not be an answer HMRC likes.
I am told by several people that HMRC like Umbrella Companiesbecause they collect and pay lots of PAYE and Tax to HMRC and do itvery well, ( that is certainly true for the ones that are compliant andefficient ).
On the other hand, if Umbrella Companies do not exist, then theAgencies or the Clients would do the PAYE collections, so really thereis not much need for an Umbrella Company.
Umbrella Companies may counter that they provide OverarchingContracts of employment, they pay minimum wages at least, they coversick pay, holiday pay and maternity pay, and even provide employmentlegislation protection. It is certain that the compliant UmbrellaCompanies do all this BUT, if you there was no Umbrella Company, thenall this would be provided by either the Agency or the Client underexisting legislation.
Back to the original question, then. Apart from a tax advantage thenwhy does an Umbrella Company exist ? Well its difficult to come up withany real answer , is it not ? ( Please let me know if I have missedsomething....).
One concern I have is this is really the same for what was known asComposite Company operators. They existed to provide a tax advantagefor the worker over other employees. The good Composite Companyoperators were efficient, paid the taxes under the rules and appliedthe rules correctly. There were also some other composite companyoperators that bent the rules and caused HMRC some problems.
The Managed Service Company regulations took away the CompositeCompanies not by saying you could not be one, but by removing any taxadvantage of a worker working through a composite company. Thelegislation also put a huge responsibility on the agencies so that itwas too much of a risk for any agency to recommend workers to use acomposite company.
HMRC have gone through a consultation process on the expenses issuefor Umbrella Companies, have identified that they have issues that theywant to do something about, and have issued a stern warning to theindustry that they are going to do something about it.
We should expect changes for Umbrella Companies for sure.
In the meantime, for a Professional Contractor and Freelancer whoreally wants to run their own business the opportunity is there and fortheir colleagues who would rather not run their own business and be anemployee, I think they will see have to start to accept that they willbe taxed like an employee.