FAQs

What is an umbrella company?

An umbrella company offers contractors most of the benefits of being a limited company without all the responsibilities and cost of the financial management. It means that contractors can be legally tax efficient and avoid all the implications of IR35.

Working in conjunction with the HM Revenue and Customs, providers of genuine umbrella services can allow contractors to genuinely offset business expenses, against tax.

We are glad you asked!

2007 saw many "new" Umbrella Companies popping up and many old "Umbrella Companies" reinventing themselves. This can be very confusing and you must consider the risks and benefits of being with these organizations.

A PAYE Umbrella structure should adhere to these principles:

• You are employed by that business and you have a REAL employment contract, the Umbrella Company will engage with the Recruitment Agency or the Direct Client to provide a skilled individual (you) and you are employed to deliver that assignment.
• Expenses - you can only claim for legitimate business expenses, having a "dispensation" (a letter from the Tax man) does not mean you do not need receipts and can claim for things you do not incur as a cost. Remember, it will be down to YOU to pay the tax when HMRC come knocking!
• Being charged % fees is not only expensive for you but an indication that you are not truly with an employer... why would an employer charge you a variable amount to prepare your salary? Worse case, some even hold back your money to cover fees or charge more for processing your expenses!

Parasol provides PAYE umbrella services to its clients. We employ contractors directly as Flexible Employees. The Flexible Employee submits timesheets and expenses claims through our on-line system, we invoice the client/agency on a weekly or monthly basis on the contractors’ behalf, we receive and manage the payments and pay the contractor direct into their bank account.

As part of the process, Parasol calculates and deducts National Insurance and Tax at source, easing the admin burden and ensuring that each Flexible Employee wholly complies with HM Revenue and Customs.

The contractor gets the perceived freedom of being “their own boss” and choosing who they work for, without having the stress and responsibility of being a company director.

In addition to the main PAYE management services, umbrella companies such as Parasol provide a whole range of additional services and benefits specifically designed for contractors. Financial services such as pensions, mortgages and Life Assurance as well as Legal support services are all tailored to meet the very needs of the contractors.

What is IR35? (and all those other tax related things I have seen mentioned?)

“IR35” is a piece of tax legislation announced in 1999, which took effect from April 2000.

It 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. The Revenue viewed this as "disguised" employment and believes the single company format was simply a way to reduce tax. IR35 was a response to that and over seven years later it is still in force. 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.

There are therefore many products and schemes that offer IR35 insurance or IR35 friendly contracts. Unlike Parasol, some umbrella "schemes" use dividend payment systems and provide these insurances.  Whilst these can seem attractive to the back pocket, the contractor is still exposed to potential residual tax liabilities (HMRC can go back six years when they are auditing) or complicated defense strategies. It is therefore very important in our view to be on the correct side of the fence when deciding how to structure your working affairs.

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 the Revenue 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.

It is probably worth stating again that the Parasol employment service is completely not affected by IR35. The Parasol employment product is neither a disguised scheme nor a service that need IR35 "insurances".

*the net figure is variable due to the nature of your employment with Parasol