Here’s a handy selection of the questions we’re most frequently asked by both existing contractors and freelancers, and those considering joining the big wide world of contracting.
Take a look at our answers and if anything isn’t clear, or your query isn’t covered, then please contact us and we’ll get back to you with an answer ASAP.
We’re glad you asked! An umbrella company offers contractors most of the benefits of being a limited company without all the responsibilities, hassle and cost of the financial management. It means that contractors can be legally tax-efficient and not be concerned with all the implications of the dreaded IR35 rules.
Working in conjunction with HMRC, providers of genuine umbrella services can allow their employees to receive reimbursement for legitimate business expenses which are paid PAYE tax and NIC free.
The last few years has seen many new umbrella companies coming out of the woodwork and a few old ones reinventing themselves. Before putting yourself, your reputation and your hard-earned finances in the hands of any such organisation, it’s worth noting that any PAYE umbrella structure worth its salt should adhere to the following principles:
- You should be an employee of that business and be given a REAL employment contract.
- They should engage with the recruitment agency or client on your behalf to provide a skilled individual (that would be you!) to do specific work.
- They should invoice all work undertaken by you, chase and collect payment and deduct tax and NI at source plus reimburse you for any legitimate business expenses you have incurred PAYE tax and NIC free.
- A word of warning about legitimate business expenses! Having a “dispensation” (a letter from the tax man) doesn’t mean you don’t need receipts and can therefore claim for things you haven’t bought. Remember, it will be down to YOU to pay the tax when HMRC come knocking!
Parasol employs contractors directly as employees. The employee submits timesheets and expenses claims through our all-singing-all-dancing online portal, we invoice the client/agency on a weekly or monthly basis, we receive and manage the payments and pay the employee direct into their bank account.As part of the process, Parasol calculates and deducts NI and tax at source, easing the admin burden and ensuring that each employee wholly complies with HMRC.Our employees get the best of both worlds – freedom & flexibility, but without the stress, hassle and responsibility of being a company director.
IR35 is a piece of tax legislation announced in 1999, which took effect from April 2000, that effectively seeks to tax contractors, consultants, freelancers and other types of trading arrangements as if the individuals were employed by the end client themselves.
Historically, small single person companies were set up and used to reduce the amount of taxation paid through using dividend payments. HMRC viewed this as disguised employment and a way to avoid paying tax. IR35 was a response to that and over a decade later is still striking fear into the hearts of freelancers!
There have been many arguments that small companies should be allowed to trade as if outside of IR35 and thus able to still make tax efficient dividend payments.
Today, unlike Parasol, some umbrella schemes still use dividend payment systems and offer IR35 insurance or IR35 friendly assignments. But – and it’s a big but – contractors in these schemes are still at risk of having to pay back underpaid tax going back some six years. In our view, it’s just not worth it.
That’s why, when you join Parasol you become a PAYE employee of our company and pay your tax and NI contributions through the normal HMRC channels. Neither Parasol, nor our employees, are affected in any way by IR35.
To see what your take home pay as a Parasol employee could be use our online calculator, safe in the knowledge that everything is above board and within the tax laws.
You may have also seen reference to “S660a” in your research. This relates to tax legislation to clamp down on paying spouse dividends through a company route, which again HMRC viewed as avoidance.
Some schemes still exist that provide this type of trading arrangement but clearly employing a partner/wife/husband who genuinely does not contribute to the business is a risky approach.
These are the costs incurred during your day-to-day business that have been authorised by the client or agency to be reimbursed by them. This can include a wide range of things and it’s important that all client billable expenses have been clearly identified and agreed between you and the client or agency before the start of any contract, so there’s no confusion.
As well as the paperwork you’ll need to complete for the client, an online claim must be made to us via the My Parasol portal. We’ll also require all original receipts relating to your claim*. For every online claim submitted, an invoice will be automatically generated which we will then send on to the client or agency.
* If you are entering a claim under a VAT chargeable category we will require an original VAT receipt or a scanned and emailed copy of the original receipt.
Our sister company, ClearSky Accounting, is a limited company and contractor tax specialist that has over been in business since 1995 and shares the same values and prides itself on providing great customer service and no nonsense accountancy advice.