Q. I have been working outside IR35 via my limited company for the last 18 months. With private sector reform on the horizon, I may well be offered a role inside IR35 and therefore have been considering working through an umbrella company. The quotes from umbrellas regarding net pay have varied (57%, 67%, 68% and 78% of day rate). Naturally, the higher rates are attractive but some are higher than the rate I achieve when working outside IR35 through my limited company. Please can you help me understand which rates are likely to be HMRC compliant? One of the umbrellas I’ve contacted referred me to a ‘growth share’ scheme. Should I be wary?
A. With the off-payroll reforms scheduled for April 2021, it makes sense to look at the options available to you in advance. Having this knowledge now may help you renegotiate rates and have conversations with recruitment agencies and end-hirers about any adjustment needed to your rate.
The large variance in your quotes suggests that some of the businesses you have contacted are not operating compliantly. This is a problem in the umbrella industry and something that Parasol and the Freelancers and Contractors Services Association (FCSA) are working hard to raise awareness of. The industry is not currently regulated and although the Government committed to this in 2018’s The Good Work Plan, we have yet to see much progress, which is disappointing.
It is likely that the ‘umbrella companies’ offering you take-home pay at the higher end of the scale are actually tax avoidance schemes that have found some ‘loophole’ in legislation that they intend to exploit to lower your tax liability. They will likely charge you a hefty fee for the privilege.
The problem with such schemes is that they are not sustainable and when HMRC catch up with them (as they did with the Loan Charge), it will be you that is left with a substantial tax bill plus any associated interest and penalties.
A compliant umbrella company will employ you and as such, all the income from the assignment will be subject to PAYE tax and national insurance deductions. If you are not subject to Supervision, Direction or Control (SDC) on this assignment, you may be able to claim tax relief on certain legitimate business expenses. You may also be able to benefit from tax relief on contributions made into your private pension, but this is where the tax efficiencies should end. Any other schemes, loans or shareholdings offered to you should raise a red flag.
We don’t know exactly what is being proposed here but we would be suspicious of this ‘growth scheme’. A growth share plan, if properly set up and administered, can be a legitimate way of incentivising employees to help grow a business. However, it is hard to see how this might work in the context of umbrella companies. This company may be seeking to reward you with ‘growth shares’ to take advantage of the CGT annual exemption and lower tax rates applicable to the returns. But if this is simply instead of giving you normal taxable employment income, this may well be an arrangement that is caught (at the very least) by HMRC’s General Anti Abuse Rule.
When researching umbrella companies, looking at the highest take-home pay percentage, whilst understandably attractive, is not the way to go. All the compliant providers will be working with the same HMRC rules and the actual take-home pay should not differ much. Consider instead the ability to make payments into your pension scheme, online reviews, the benefits package offered and most importantly their compliance. A great place to start is with FCSA accredited suppliers.