Contractor Umbrella Companies
Contractor Umbrella Companies sprung up after the advent of IR35 in 1999. Companies were making employees redundant on the Friday. They re-hired them, again, as contractors on the Monday.
This suited the company. They now had a more flexible workforce and were able to save on National Insurance.
The employees got the benefits too as they were able to set expenses against tax. They, also, were able to save tax by getting paid in dividends rather than the higher rate of income tax.
Government and HMRC
So, who lost out? The Government and HMRC did. They didn’t like that. They perceived those people as ‘disguised employees’. They set up the IR35 Tax to catch them.
However, IR35 caught not just those in its net but also many genuine contractors. They had been working for years through Limited Companies.
This was accidental but the Government saw how much extra money it was bringing in. They were pleased with that.
PCG Set Up to Fight IR35
However, contractors were not. The Professional Contractors Group was set up to fight IR35. They wanted IR35 abolished. They didn’t succeed. However, they managed to push back the boundaries a little.
Another effect was that people set up Contractor Umbrella Companies. Whilst the Government saw the original ‘new contractors’ as ‘disguised employees’, contractors in these Companies were really ‘disguised contractors’.
These new companies allowed contractors to claim some expenses against tax. Those were expenses that permanent people couldn’t claim.
Through these umbrella companies these contractors could claim for such things as travel and overnight accommodation. These contractors acted like normal contractors but had their money paid in to contractor umbrella companies.
The contractor umbrella companies invoiced the client. They then deducted expenses. Then they paid the PAYE tax to the taxman.
This was as if the contractors were permanent employees of the Companies. This was even though he or she did no work at all for them.
Although they lost some tax through this, HMRC are happy with this arrangement. There are 200,000 contractor umbrella companies ’employees’. They would prefer to deal with a few hundred contractor umbrella companies than 200,000 contractors.
Many contractors are still in Limited Companies. They are not caught by IR35.
Offshore Umbrella Companies
Others have joined offshore umbrella companies. These companies take contractors’ money direct from their agencies or clients. They keep it in places such as the Isle of Man. They then give contractors loans in lieu of the money.
The original money is only taxable if and when it comes back onshore. It never does. The company keeps it in lieu of the loans that the contractor hasn’t paid back. It is tax avoidance but it is legal.
In fact it was one of the first laws that Mrs. Thatcher made when she came to office in 1979. The law said that money leaving these shores was no longer taxable. A couple of generations of Tory Grandees and party donors have used these schemes very profitably.
David Cameron’s father made his money that way. Lord Astor, David Cameron’s father-in-law, has made a fortune this way.
So has Lord Ashcroft, the Tory Party’s top donor and ex-Party Chairman. As also has Chancellor, George Osborne, who has an offshore family trust worth £4.5m.
Another is Margaret Hodge. She is the Labour MP who has bashed the Government and pop stars and comedians who have used offshore umbrella companies and other schemes. It turns out that she has benefited form an offshore scheme set up by her brother.
Now many UK contractors are going the offshore umbrella route rather than operating through Limited Companies or contractor umbrella companies.
They can get anywhere between 84% and 91% of their money returned to them. That is more than they would through a Limited Company. It is much more than they would get if they used contractor umbrella companies.
Umbrella Company Lists
For a list of offshore umbrella companies see Offshore Umbrella Company List
For a list of contractor umbrella companies see Contractor Umbrella Company Directory
For a list of Accountants, if you go the Limited Company route, see Contractor Accountants List