An umbrella company effectively acts as an employer to self employed contractors that work under a temporary contract. Many businesses that contract out work will only do so to limited companies so working under an umbrella company allows self employed contractors to tender for this work. Since the introduction of the new legislation in the 2007 budget the only way an independent contractor can comply with this requirement is to set up a limited company, which can be very hard and time consuming, or use an umbrella company. An umbrella company issues invoices to the contracting agent (or client) and when payment of the invoice is made, will pay the contractor through PAYE, so facing the same tax charges and benefits which employed status brings.
The IR35 legislation "Tackling Managed Service Legislation," was introduced to address the use of "composite" structures to avoid income tax and National Insurance on forms of trading that the Treasury deem as being akin to being "employed." After a period of consultation and re-draft, the legislation became statute in April 2007, with additional requirements coming into force and finalised by January 2008. PAYE umbrella companies are effectively exempted from the legislation, which also seeks to pass the possible burden of unpaid debt to interested parties.
Whilst many umbrella companies advertise similar offerings, it is essential to check what is actually being offered. Often expenses are used as a selling point with potential abuse of "dispensation." Just recently there has been much debate about umbrella companies and increasing levels of illegitimate tax relief, particularly through travel allowances.
Umbrella companies have become more in number since the Government introduced the IR35 legislation which makes it much harder to start your own company and more beneficial to join an umbrella company and enjoy employed status benefits.
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Liberty Bishop Ltd
Clayton House
3 Vaughan Road
Harpenden
Herts
AL5 4EF
http://www.libertybishop.co.uk
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