IR35 and Umbrellas – THE TRUTH
What do IR35 and Umbrellas have to do with each other? As I explain below, not as much as the industry would have you believe.
The dictionary defines an umbrella as ‘A device consisting of a circular canopy of cloth on a folding metal frame supported by a central rod, used as protection against rain’.
An umbrella company, which is a PAYE payment vehicle, is a method that many are recommending strongly to contractors who are being deemed Inside IR35.
The metaphor of an umbrella that is used to brand these PAYE payment companies is I think a good one. An umbrella should be used when it’s raining heavily and you will get very wet if you go outside. But otherwise, why have the uncomfortable weight of an umbrella to carry all day.
If you as a contractor have, unfortunately, been given an Inside IR35 determination by your end client and must now accept for the time being on this particular contract that Tax and NI will be deducted from your income as if you were an employee, it is quite likely that you be directed towards using an umbrella company.
However, the better choice for reasons explained below and in our guidance document is to continue to use your own limited company. Please click here to see our Deemed Limited Inside IR35 Guide.
Continuing to use your own limited company is a little confusing at first glance, as you will not use it as you did previously when you were in full control of how you were paid. Your company will send an invoice as normal but the end client or agency paying will have labelled you as a ‘deemed employee’ and tax your income as an employee paying over to your company the net after the tax deductions.
But having an accountant in your corner, namely Cogent, means you don’t have to worry about how the mechanics will work. We will do everything for you.
The advantages of using your own company are explained in the guidance note, but here are the key points at a glance:
- Going the Deemed Limited route provides continuity with the use of your existing limited company and no setup whatsoever.
- You continue to have some control over your business life and can look for other work, as there are end clients who are giving out contracts outside of IR35 or IR35 neutral, paying gross invoices without tax deductions as a deemed employee. If you cannot get a full-time contract, you may still get some small contract work which will build up your income streams and may grow into a larger contract or other referrals. Your company can have Inside and Outside IR35 contracts running at the same time.
- Some end clients are viewing status determinations more favourably and some within the new Off-Payroll legislation are exempt, such as small companies (roughly less than £10m turnover and other tests) or wholly overseas clients (no UK office/branch base at all). So, you can actively look for work with small or overseas based companies. At the moment with Covid and travel issues, many such contracts are home based without the need for travel away from home.
- There are untrue statements being made in the industry that using your limited company will incur double taxation. Clearly NOT true. HMRC are clear that there is no company tax on the income already taxed as an employee.
I would suggest that when you are given a status determination of ‘Inside IR35’, you should show your own determination to work as you want. You have no control on the taxes being deducted with an ‘Inside IR35’ contract, but you have control to continue to use your own company and you should ask for that.
We are here to explain and provide guidance on all aspects of Off-Payroll / IR35 and continuing to use your company for invoicing.
Best regards,
Victor Korman
Managing Director
Cogent Accountants