Tag Archive | "umbrella companies"

An early Christmas present for umbrella company contractors


With Christmas just around the corner, it’s seems the Government have thrown themselves well and truly into the festive spirit.

Umbrella company contractors will be pleased to hear that the new rates for maternity, paternity, and statutory adoption pay will rise from £123.06 per week to £124.88 from 4 April 2010.

This is good news for those planning a baby, and particularly surprising given the fact that the official RPI for September was -1.4 per cent.

The new rates, which have just been announced by The Department for Work and Pensions (DWP), were published through a fairly low key press release. Indeed, several commentators believe that the changes have been so badly publicised, many small businesses will remain blissfully unaware of the announcement.

Steven Tucker, director of The Payroll Site, can’t believe the government was so poor at promoting it’s own positive news. “This will be really welcomed for many employees but the actual announcement was buried on page 13 on an attachment to a press release about pensions. I mean, why bother?”

Limited company contractors and contractor accountants are being advised to check their payroll software to ensure the new rates are set-up from next April.

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Pre Budget Report 2009 – crystal ball set of predictions for contractors


With the PBR set for 9 December, it will be interesting to see what changes the Chancellor makes to help struggling contractors, operating either via their own limited company or through umbrella companies.

Unfortunately, I don’t see the Chancellor providing any early Christmas presents to us. With the country in debt for approximately £200 billion, it’s inevitable that the Chancellor is going to have to use his speech to tell us that we are all going to have to pay more to bail out the country. The question is, will contractors have to pay a disproportionate amount?

A few predictions:

VAT provides a vast source of revenue for the government and I wouldn’t be surprised if this is increased to 20%. This could provided additional revenue for contractors who have registered under the terms of the Flat Rate VAT scheme – so potentially good news!

Restriction of company losses – If the government restricted losses so that they cannot carried forward and used to reduce future profits, when times improve, all limited companies would be required to pay more tax.

NIC increases – It would seem logical that we will see an increases in NIC. My guess is that the employer rate will remain as is at 12.8%, but an increase to the rate payable by employees earning above the higher rate. At present, NIC is payable by these employees at 1% on the top slice of their income. How high would the Chancellor go – 2.5 or 3%? This will impact more on umbrella contractors, as those running their own business can still use dividends to reduce their overall tax bill (subject to IR35).

So how will it be for contractors? Overall I see the Chancellor taking his pound of flesh equally from employed contractors as well as those running their own businesses. Therefore, the gap between umbrella contractors and limited companies will remain equal. However, the “net” income earned by both groups each will, unfortunately, go down.

Here’s hoping I’m wrong!

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How does an umbrella company dispensation affect me as a contractor?


The quick answer is that it doesn’t in the slightest and has no impact on your take-home…

Any company that repays business expenses to its employees has to account for how that money is spent and how the associated VAT has been dealt with. The usual way to do this is via some kind of proof of purchase, usually in the form of a VAT receipt or payment slip. This provides the necessary audit trail should HMRC challenge any particular item of expenditure.

However, managing and copying those receipts for even a fairly modest workforce can become a headache. To save everyone’s time and effort, companies can apply to HMRC for a dispensation to stop having to supply copies of receipts to support their P11D submission. Instead they undertake to verify all claims made and certify that the figures they supply to HMRC at year end are accurate and supportable and have been verified.

So how does that help the umbrella user with their expenses?

Actually it doesn’t make the slightest difference. The dispensation often quoted by Umbrella companies applies to their dealings with HMRC, not yours. They may decide to take your expenses at face value and not insist on seeing receipts to support your claim, but there still needs to be an audit trail. If an investigation in to an umbrellas P11D return is launched, HMRC may well be asking you to prove your claims and if you are seen to have claimed for things you should not have, then it will be you facing the penalties. As a result you are required not only to ensure your claims are correct but that you retain the proof, for up to six years.

The umbrella may use the “no receipts required” line to sell their services, but the reality is that it is entirely irrelevant to you. HMRC recognise this and in 2008 launched a crackdown on Umbrella Company dispensations, threatening to remove any that it found to have broken the rules. This was a serious threat and umbrellas have largely stopped stressing their Dispensations and “HMRC Approval” (another irrelevant myth) as a direct result.

Remember always that if the Umbrella gets it wrong, it’s you who has to pay the bill.

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As a contractor, why should I work through an umbrella company?


Umbrella companies have been around in one form or another for a while, but only really came to prominence with the advent of IR35 in 2000.

The idea is that if, under IR35, you are going to be paying taxes at the same level as a permanent employee, why have the additional hassle of running your own company, or of being employed by the agency with the limitations on finding work that implies. Using an umbrella simply removes all such issues, making getting paid a much simpler process.

Of course, this only really applies if you believe your engagement is caught by the IR35 rules. If it is not, the savings through using your own company are significant. However, for now we will assume you are in fact inside IR35.

There is still a small saving to be made by using your own limited company, since you won’t have umbrella fees (although you may have roughly similar accountancy ones instead) and you can keep 5% of your gross to cover the basic cost of running the company. Nevertheless, the overall sums involved are comparatively small and can probably be disregarded.

By using an umbrella, you do not have to worry about payroll calculations, VAT calculations, completing assorted tax-related returns and managing company bank accounts. You do not need to go through the process of setting up your own company, getting a business bank account and registering for VAT. In other words, you can start contracting very simply with minimal preliminary work and can focus on doing the job you are being paid for.

As a result, umbrellas are ideal solutions for people new to contracting, for those who are unsure that contracting is the way they want to work long-term, and for people who are only going to be contracting for a few months, possibly in parallel to another job entirely. They also suit people who genuinely don’t want the bother of running a company – although in reality that is not that onerous for most contractors – and who do not want to be concerned about their IR35 status; as an umbrella user you are effectively an employee and IR35 cannot apply.

But step outside IR35, or decide to take up contracting full time, and you might then like to think about setting up your own company.

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10 questions a newbie contractor should ask an umbrella company


So having decided to go with an umbrella company, the next problem is to choose one. There are many to choose from and you need to do some research.

The following list of questions will help you decide which ones are those you can trust with your income; especially if you already know the “right“answer.

How many clients do you have?

Although by no means a guarantee of good service, clearly if they have a lot of clients they must be doing something right, they must have been around a reasonable length of time and be fairly stable financially.

How do you calculate your fees?

Be wary if they base their charges on your contract rate as opposed to simple weekly or monthly fees. They do the same amount of work no matter how much you are earning, so ideally they should charge a flat rate.

How much are your fees?

On the face of it an obvious question, but some will quote gross fees and others net. Fees are in effect a taxable expense, so can be quoted either with or without extracting the tax element. Neither is wrong but post-tax quotes are dependent on your exact tax position and may vary over time, so gross fees, although apparently higher, are more reliable indicators. Be sure you are comparing like-for-like.

How will you pay me?

Many will use BACS payments into your personal account, which can take a few days to process and clear. Some use CHAPS for near-immediate payment, although you may have to pay extra for it. Hopefully not many will use paper-based payment systems these days.

How often will you pay me?

Weekly is good, monthly is acceptable, any more than that is not. Ensure that you get paid against your proof of work done; it is not your problem if they or the agency have not been paid by the client.

How much will you pay me?

The usual rule is that the umbrella will take your gross income, deduct their fees and any allowable expenses and calculate your PAYE and NICs on the balance. As a rule of thumb, you will be lucky to keep much more than 70-75% of your gross unless you are paying out quite a lot above average on expenses. You are, after all, being taxed as a normal employee, using the same rules. If the umbrella is saying something significantly above this level – 85% is the usual offer – and can’t explain how, or start talking about expenses, walk away.

What about late payments?

Be very sure you understand what your contract with the umbrella says on this subject, what the actual contractual payment terms are and who is responsible for chasing up outstanding amounts; not all umbrellas will do this on your behalf.

What about expenses?

Be very wary of any umbrella that starts quoting “dispensation schemes” and “HMRC Approved expenses”. They may well have these, but they are to do with their business, not yours. You can claim any expenses the umbrella will allow you to; these will usually be all those associated wholly and exclusively with doing the job and those rules are the same for all freelancers. Some umbrellas may have set amounts for certain expenses such as overnight stays, but at the end of the day you are personally responsible for paying the correct amount of tax, and can only claim for money you have actually spent. Be certain you know the umbrella’s position on this whole area and walk away if you have any concerns.

What other extras will I be charged for?

Employers’ NICs will be deducted by the umbrella (usually their charge to the agency/client will have a small uplift to cover this cost). Because of various employment rules and regulations, the umbrella must also make provision for things like holiday pay and pensions. You may need insurances such as Professional Indemnity; if these are provided by the umbrella they may be chargeable. Make sure you understand what additional charges will be made. At the end of the day, everything will come out of your gross contract income.

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Contractor travel & subsistence expenses, HMRC, and a Ford Cortina


On Remembrance Day I had an appointment with senior officials of HMRC in Parliament St London – a stones throw from the Cenotaph. The meeting was concerning the coding of expenses incurred in travelling to temporary workplaces.

This is of major concern to employees who work directly for an end user and have to fund their own travel expenses, either in whole or in part, from their income. This will not normally concern employees who work through umbrellas or via their own companies as their expenses are reimbursed by their employer and as this website is generally aimed at contractors who work in that manner there may be no direct relevance to individuals but what I have to say is more widespread and may affect us all at some stage.

In 2006 I retired after 39 years distinguished (?) service with HMRC. I hired the Council Chamber of Chester Town Hall for my retirement “do” and there were one or two senior members of staff present. Now, your retirement “do” is the only time that you can say what you feel without fear of any come back at a later date. I did the usual thing of saying that the department that I was leaving was not the department that I had joined etc etc but, with the utmost sincerity, I said that the one thing that had upset me more than anything else was the deterioration in the standard of service that was being provided for the general public.

On and off for a number of years I managed the HMRC office in Chester and of particular concern to me was the level of service that we provided to the general public. I was of the opinion that a person could telephone without actually leaving their armchair – to write and post a letter involved considerably more effort but if a person took the time to leave their home, to travel into Chester and to call in at the office then I was of the opinion that the least we could do was to respond promptly by providing that person with the best possible service. Over the years leading up to my retirement in 2006 that standard of public service was in decline.

In my retirement speech I said that my aim had been for Chester to provide a service equivalent to the football Premiership Division but unfortunately the then current standard of service was now Fourth Division – Chester and District Sunday League. Those were my words and they didn’t go down too well with the senior officials present but – tough – unfortunately that is the way it was – my main concern was that the fourth division of the Chester and District Sunday League would accuse me of dragging their reputation down by likening them to the tax office service to the public.

Back to the meeting at Parliament St last Wednesday – it became apparent that a new HMRC computer system (hereinafter referred to as “it”) is being introduced as from 6 April next year and will have, built into “it” certain, but limited, parameters. “It” will not, for example, recognise that a person has changed employment. “It” will know that a change has occurred but “it” will not take that into account when determining the PAYE code.

This can have a serious affect – for example – you work directly for an end user and incur allowable, but non-reimbursed, travel expenses of £10000 in 2009/2010. In September 2010 you submit your 2009/2010 self assessment tax return containing that claim – your 2010/2011 code (the code for the following year) will be amended to include £10000 expenses even though you may have changed jobs and are not incurring travel expenses. Your code will be amended just the same and the onus will be on you to ring the tax office and get them to put it right – except they have already got it wrong. Say you are liable at 40% and the code change happens in October – half way through the tax year – you will get a repayment of £2000 to which you are not entitled. If you let it run throughout the year you will get tax relief of £4000 – you will be £4000 underpaid and HMRC will want it back.HMRC are public servants but this, in my opinion, is not serving the public and when I pointed this out to the HMRC reps present and compared it with what happened years ago when the public were served I was told that HMRC do not provide the Rolls Royce service that they provided in the past.

I was told that HMRC staff have been cut to the extent that standards have had to drop and that the new computer will mean that even more staff can go ……..When I had overall charge of the public counter at Chester I aimed to provide a Rolls Royce service – I think that most of the time we did very well – it was workmanlike and on the whole more than met expected standards – probably a Ford Cortina. What HMRC have now isn’t Rolls Royce – it isn’t a Ford Cortina – it isn’t even a push bike with a motor – it’s a pogo stick..

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As a contractor, what impact will IR35 have on my take home pay?


Choose a Name: The name has to be unique, obviously, and not likely to be confused for someone else’s existing name. The best reference point is the Companies House website – www.companieshouse.gov.uk – which has a simple search facility so you can check your chosen version. Also, try to avoid names that are specifically related to your line of work, just in case you want to change careers later: imagine selling cars though a company called Al’s Bakery.
Decide on Share Ownership: Is this just you, or you and your spouse, or you and two or three other people? This is important, because it defines how to allocate the Ordinary Shares In the company. Dividends are paid in direct proportion to numbers of shares held. A husband and wife typically have 50% each, for example, but if one is already earning money, be aware of the impact of the share income on their tax position. Share allocation can be changed after the event. There are several variations on share management; but for anything other than a simple allocation of ordinary shares, get expert advice.
Register at Companies House: There is an online system you use to set up your company and pay the registration fee. It is fairly simple to use. One question it will ask is who the directors are. For a typical small contractor company you only need one but there’s no reason not to have more. Although not strictly necessary any more, it also helps to nominate a Company Secretary: this could be the same person, but it’s more sensible to have someone else, a partner or relative for example.
Register a Memorandum of Association: Something else to do while you are at Companies House. At its simplest this is a document describing what your company is for and how you wish to run it. You can do it yourself, but the document can have legal implications in a tax investigation so do some online research for a suitable template from sites such as www.simply-docs.co.uk or www.clickdocs.co.uk.
Set up a Bank Account: This has to be a business bank account. Banks are increasingly wary of new business accounts, so you will have to answer some detailed questions and it will help if you have some professional references and a signed contact to demonstrate you actually will have an income.
Register for VAT: You have to do this if your annual income is in excess of a set amount (currently £67,000 pa) but it Is advantageous to register anyway. VAT and the Flat Rate Scheme are discussed in more detail elsewhere.
And that’s it. It sounds complicated but is in fact quite straightforward. You can also take the easy way out; either use a company formation agent, or there are several accountants who specialise in contractors who will set up all if the above for you for a small fee, or even for free, as well as providing expert support. Finally keep track of all your various expenses setting the company up, since you can reclaim these once you start trading.

While it is fair to say that IR35 will have an impact on your own net income, quantifying exactly how much impact is not that simple, since there are several variables. You can, however, compare the overall results in general terms.

There are basically four ways to get paid as a freelance contractor: under normal PAYE, either on a fixed term contract or as an agency employee, through an Umbrella company, with your own company operating inside IR35 or with your own company operating outside IR35.

Normal PAYE

Whether you are on a Fixed Term Contract – essentially a normal employment contract but with a pre-agreed termination date – or are employed by the agency who found the work, you will be treated as a normal employee for tax purposes and pay all the usual taxes and NICs. Expenses are very much at the discretion of the employer or agency, but will be limited.

IR35 cannot apply and hence has zero impact.

Umbrella Company Contractor

You are in effect an employee of the umbrella and so IR35 cannot apply. Once again, you pay full PAYE and NICS on your income. However, out of your gross you also have to pay Employers NICs (usually the contract rate will have been raised to cover this cost) and the umbrella’s service fees. You can, however claim various working expenses that will reduce your overall tax burden; in effect the costs you incur by working become tax-free income. Beware, though, that all such expenses have to be justified and verifiable and treat claims by umbrellas that they have generous expense policies to increase your take-home with a degree of caution. The umbrella will also make other deductions to cover various statutory requirements such as holiday pay and pensions

The end result is you will take home more net income than straight PAYE, precisely how much depends on your level of working expenses.

Own Company inside IR35

At its simplest, and starting with your gross income from the contract, you can deduct 5% to cover operating costs of having your own company, allowable business expenses such as travel and equipment costs, Employers NICs paid during the year and any salary paid during the year. The balance remaining is the “Deemed” income and is liable to full PAYE and NICs.

In terms of overall impact, you are paying tax on 95% of your gross rather than the 100% if you are working through an umbrella, so there is a small benefit to this approach.

Own Company outside IR35

You can set a salary level of your choosing and then take any post-tax profits in the form of dividends, which are not liable to NICs. Setting a gross salary to the same as the tax free personal allowance therefore means you can save significant amounts of taxation. You offset salary payments, working expenses and other costs such as training (which is not allowable under IR35) and pension payments against your gross, pay Corporation Tax on the net profit, the balance being the amount available to you as dividends. You can also leave some or all of those profits in the company for later years.

The overall impact is that you will retain a higher percentage of your gross income than through any other route. However, it does mean that you have to be certain of your IR35 status.

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Contractors given temporary relief from the Agency Workers Directive


With the delay of the Agency Workers Directive (AWD) until October 2011, there is at last some relief for contractors. Make no mistake, AWD as drafted would have a big impact on contractors given that agencies and end-clients would be forced into processes that would at best delay placements and at worse, remove some of the roles available.
But it’s only a temporary relief, October 2011 is fixed in stone but at least there is time to plan properly and get all our heads around it. The really ironic thing for umbrella contractors is that much of what AWD tries to do (equal rights with permanent employees) is already provided by businesses like Parasol. On the other hand some contractors don’t want the same rights as the “permie” but because Europe and UK Government can’t differentiate between true vulnerable workers and contractors then everyone is caught. I would still urge everyone to lobby the government to push the point around understanding the labour market in the 21st century as without continued focus everyone will be classed as “vulnerable”. Make no mistake, I am no advocate of exploiting workers and some of the previous practices are rightly condemned but we seem to be blindly lumping everyone together because Europe don’t “get” contracting and the UK Government are scared to define anything. I understand the last point to some degree, they will be concerned that sharp operators will find a loop-hole and that’s another reason why umbrellas (who mainly employ professional contractors) are caught specifically.  It did not make a world of difference to Parasol contractors as we have a very robust employment model and a true accountancy practice but of course, by association we get pulled in.
So business as usual for us all in a time when that does make sense for a change. Contractors can get the roles that are coming up, agencies can plan and end clients won’t be hassled for pay rates and conditions, well not yet anyway.
I have a long held belief that UK plc is stuck between two camps and never gets clarity as a result. As a member of the EU we are held to some of the social chapter practices that don’t work for our markets. We also try to be entrepreneurial yet quite often go too far with that too (banking anyone?). AWD is a good manifestation of that problem, socially driven with the desire to protect workers not getting rights (a good thing) versus some complicated carve outs to try and allow the UK to function (excluded if you work for less than 3 months on one client) for our more flexible approach to business.  So we are stuck between the two and guess who ends up paying?
A braver person may have produced a definition of worker and a framework to prevent abuse (that’s what we lobbied for).  That’s an opportunity missed in my opinion and AWD will loom in the background as a distraction we could all do without.

With the delay of the Agency Workers Directive (AWD) until October 2011, there is at last some relief for contractors. Make no mistake, AWD as drafted would have a big impact on contractors given that agencies and end-clients would be forced into processes that would at best delay placements and at worse, remove some of the roles available.

But it’s only a temporary relief, October 2011 is fixed in stone but at least there is time to plan properly and get all our heads around it. The really ironic thing for umbrella contractors is that much of what AWD tries to do (equal rights with permanent employees) is already provided by businesses like Parasol. On the other hand some contractors don’t want the same rights as the “permie” but because Europe and UK Government can’t differentiate between true vulnerable workers and contractors then everyone is caught.

I would still urge everyone to lobby the government to push the point around understanding the labour market in the 21st century as without continued focus everyone will be classed as “vulnerable”. Make no mistake, I am no advocate of exploiting workers and some of the previous practices are rightly condemned but we seem to be blindly lumping everyone together because Europe don’t “get” contracting and the UK Government are scared to define anything.

I understand the last point to some degree, they will be concerned that sharp operators will find a loop-hole and that’s another reason why umbrellas (who mainly employ professional contractors) are caught specifically.  It did not make a world of difference to Parasol contractors as we have a very robust employment model and a true accountancy practice but of course, by association we get pulled in.

So business as usual for us all in a time when that does make sense for a change. Contractors can get the roles that are coming up, agencies can plan and end clients won’t be hassled for pay rates and conditions, well not yet anyway.

I have a long held belief that UK plc is stuck between two camps and never gets clarity as a result. As a member of the EU we are held to some of the social chapter practices that don’t work for our markets. We also try to be entrepreneurial yet quite often go too far with that too (banking anyone?). AWD is a good manifestation of that problem, socially driven with the desire to protect workers not getting rights (a good thing) versus some complicated carve outs to try and allow the UK to function (excluded if you work for less than 3 months on one client) for our more flexible approach to business.  So we are stuck between the two and guess who ends up paying?

A braver person may have produced a definition of worker and a framework to prevent abuse (that’s what we lobbied for).  That’s an opportunity missed in my opinion and AWD will loom in the background as a distraction we could all do without.

Rob Crossland is the Managing Director of Parasol
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The Potted Guide to IR35


This is not and does not claim to be a definitive guide to IR35 and how to avoid its clutches. That is something that has defeated many experts over the last ten years. However, I hope to provide a summary of what we do know about IR35, what all the arcane acronyms really mean, and which bits are the important ones.

There is a lot of detailed discussion out there; too much to be easily read these days. Much of it has been written by people with their own agenda which is why some advice seems to conflict with other versions. So I thought a simple and pragmatic overview from an informed freelancer’s side is probably overdue.

What is IR35?

IR35, or the ”Intermediaries Legislation” as it is more properly called, was announced in the Budget of 1999 and came into force in April 2000. Its aim was to stop people using dividend payments instead of salary in order avoid paying a large percentage of their National Insurance contributions. It didn’t try to make that practice illegal, since that would be rather difficult, but it attempted to define a set of conditions that would make you pay those “missing” NI contributions.

Its real genius was to fail to define what those conditions are. Instead it said that if you look like an employee, you will pay tax as an employee on all your earnings, except we’ll give you 5% to cover your working costs since you are not an employee. You can see why there might be a degree of confusion.

The definition of an employee has been set by case law over many years. At its simplest, it comes down to three key concepts: Direction and Control, Mutuality of Obligation and Right of Substitution. Each needs to be defined in the contract and, obviously, the contract has to match reality pretty closely if it is to stand up in court.

Direction & Control

Direction and Control means that the client can tell you what to do. If however, he can tell you to do things that are not directly relevant to delivering what it is you are there to do, then that is excessive. A quick check is “Do the permanent staff have to do this to do the job?” If they do, then fine, if not it is excessive. This needs to be managed with a degree of care and sympathy, of course: no point staying outside the client’s rules on hours of work and then simply not turning up because you fancy a day off. Equally, most freelancers are given an objective, a set of quality constraints and a time scale; those are not Direction and Control, since you are free to deliver the objective in the best way you see fit.

Mutuality of Obligation

Mutuality is a bit complex but at its simplest, does the client have to offer you work, do you have to accept it if offered, and can you charge when there is no work to do. There will be an irreducible minimum of Mutuality in any contract, but for our purposes the simple maxim of “No work, no pay” will work as the basic key test.

Right of Substitution

Right of Substitution is fairly clear cut: can you send someone else to do the work. Employees can’t do that, so if you can, you are not an employee. However, the client has to have some say in the matter. The usual formula is along the lines of “you may send a substitute subject to the approval of the client, such approval not to be unreasonably withheld”.

Any one of the above should be enough to take you outside IR35, but the ideal would be all three. And let’s be clear, the above three conditions genuinely have to exist in reality as well as in the contract. A case (Dragonfly) was lost recently in part because the client denied they would ever accept a substitute for the worker, despite there being a clear clause in the contract that substitution was possible (a clause that was added some time after the engagement began, incidentally).

There are some other myths around IR35 that may be worth noting. Using your own kit is good, but if you have to use the client’s kit, it’s not that much of an issue. Having to work on site is not an issue if you have to be able to interact with other workers to do the job (although exactly when you are on site is up to you, as we have said earlier). Having multiple contracts is not a defence, since IR35 is applied on a per contract basis. Multiple clients may show you are genuinely in business but that seems not to be a major criterion in determining IR35 status despite, it being said very clearly that people in business on their own account would be outside the rules (Dawn Primarola, Paymaster General in 2000, is on record as having said precisely that).

Incidentally, Umbrella users are not and cannot be subject to IR35. They are employees in law and pay employee’s taxes (as well as employer’s taxes, come to that) so are out of scope.
The real trick is to think like an independent business, not as a temporary employee of the client. If you look at the engagement on those terms, much of the distinction between inside and outside IR35 becomes, if not clear, at least a little clearer.

IR35 Investigations

Finally, if you lose an IR35 case it does not currently mean that you are therefore an employee. The tests they use to determine status are the same but it’s only about taxation, not rights of employment. One day someone may press the nuclear button and claim employee rights because IR35 says they are one, but that hasn’t happened yet.

Losing a case means all relevant tax declarations, personal and corporate, will need to be recalculated and the balances paid over, with interest. As long as you have tried to determine your IR35 status, penalties will not be applied: that is about the only good thing about the whole sorry mess.

And to close, let me offer the comforting thought that the vast majority – well over 98% – of IR35 cases challenged in court to date have found in favour of the freelance being outside.

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What all contractors should know about the agency workers directive


Many contractors have already heard about the proposed Agency Workers Directive (AWD), but not everyone truly understands how it will affect the contracting and recruitment markets in the UK.

Whlst attempting to establish the EU economy as the best in the world, the AWD’s objective is to create the most appropriate framework of employing temporary workers in the EU and to ensure that these individuals are not discriminated against.

Of all the countries in the EU, only the UK has such a well established recruitment marketplace, which is why approximately 1/3 of all EU agency workers are based here. In Italy, employment agencies were considered illegal until only very recently.

With consultations on-going until 18th October 2009, the Government is now studying the possible impact of the AWD on temporary agency work in the UK. The EU is expected to adopt the proposed directive by September next year, to be implemented into UK Law in two years time.

Impact on UK Contractors

So what does all this mean for UK freelance contractors? Well, there are several proposals currently in consideration, most of which have been included to provide temporary workers with the same (or at least similar) rights and conditions to permanent workers. Recruiters are being asked to scrap Temp-to-perm transfer fees and end clients will need to inform agency workers of available permanent positions.

According to the proposals, member states may refuse the equal treatment of temporary workers but only in the following circumstances:

* temps are paid between assignments (this is rare in UK);
* they are covered by collective agreements (this is also very rare);
* the assignment is for less than 6 weeks (the Government is pushing for a 12-month limit whilst some MEPs believe that there should be no limit at all)

The DTI predicts total costs of between £80 and £194 million to recruitment agencies and the cost for clients between £239 and £387 million. Costs to payroll and umbrella companies have not been estimated. According to some, the DTI’s Regulatory Impact Assessment lacks any objective data on temporary work in the UK and the EU – its quoted figures are therefore questionable.

Since the AWD requires equal pay and benefits for temps, it is believed that temporary work on the whole in the UK could decrease considerably. The UK government contests that the AWD must not include workers pay since Article 137 of the EC Treaty clearly states that, ‘the provisions of this article shall not apply to pay’. The inclusion of pay would mean that the payroll company (umbrella) or recruitment agency must obtain detailed information on a client’s pay standards in order to ensure that temps are not paid less.

Conclusion

The proposed AWD, once adopted, could greatly impact the freelance recruitment industry in the UK and contractors should prepare for the possible consequences. We recommend that you write to your MP and MEP to explain and give examples of how much this proposed directive could cost you.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Danger extreme by Dano

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