Were Umbrella Companies Ever Meant to be a Long Term Solution for Contractors?
In simple terms, No is the answer.
A few months ago FW Accounting closed their Umbrella Solutions business stream. This was due to a number of reasons, with the main two being;
Following completion of our regular reconciliation of the clients taking this option, the majority of them proved to highly benefit from the tax efficiencies of being the Director of a Limited Company, and many of them found their skill set and contract secure enough to make that move.
The tightening of Temporary workers legislation meant that it wasn’t the most compliant option for either the Contractors or us.
The impact we have felt on our business as a result of the Umbrella solutions closure? Negligible. This leads us to believe that perhaps the demand for such solutions has diminished significantly.
What was the original purpose of Umbrella Companies?
As with most things in the Contractor World, you can point an incriminating finger at IR35 Legislation. By introducing IR35, the Government sought to ensure that all Contractors were Limited Companies operating as true service businesses, and not as ‘disguised employees’ just to avoid paying the full amount of taxes due.
IR35 legislation put a fear into Contractors making them less likely to trade through a Limited Company and utilise the tax efficiency advantages of this trading method. Until such a time when PCG were successful in abolishing the IR35 legislation, which many of us thought would be a speedy process, Umbrella solutions could have looked like a less risky way of trading for Contract work.
The Importance of Being a Truly Self Employed Individual
As Director of a Limited Company, tax efficiencies are to be made through a mixture of a lower salary and accompanying dividends. To allow for these tax efficiencies, the pre requisite is the individual must be truly Self Employed.
At FW Accounting, we provide an IR35 Contract review service as standard through our compliance partner Qdos Consulting, thus ensuring that this contract is genuinely a contract for services , showing that you have key contractual obligations such as ; right to substitution, right of control, and mutuality of obligation (there is much more that should be present also). This is great in terms of a Contractors contract, however what we also urge our clients to consider at all times, is their day to day working practices as these must reflect their contract.
To help clients determine whether they are in the “low risk” category of IR35, we have produced an IR35 12 point test.
If you are still trading through an Umbrella Solution and feel that this may no longer be the correct fit for you, it might be time to speak to a Specialist Contractor Advisor here at FW Accounting, and look at the other options available to you.
FW Accounting. You Count. We Count.