Contractors usually work in one of two ways: either through a limited liability company, or as part of an Umbrella contractor.
Here are the reasons an independent professional can work with Umbrella.
- Contractor caught by IR35.
If the IR35 caught the contractor, it is best to be with Umbrella, as they may require a limited amount of expenses that they would not be allowed if they simply paid the IR35 tax.
- The contractor is not sure that the IR35 will catch him.
The tax collector decides on the contract whether the contractor is inside or outside IR35. This means that the contractor can conclude one contract and refuse the next. In this situation, the contractor may want to work through Umbrella just in case.
- Contractor wants to focus on the Contract
Umbrella treats contractors as workers that may require certain costs. Many contractors do not want to take on their own VAT and accounting and are happy to pay someone else to take responsibility so that they can focus on what they do best, and that’s the hiring.
- Contractor does not want years of IR35 tax investigation
Many contractors operating through corporations have been under investigation for years with IR35 HMRC. Many of them are outside IR35, but lost a lot of time and energy, and were also worried about it. Others were found within the IR35 and had to pay taxes, interest and fines for several years, which sometimes exceed 100,000. Many contractors do not want to worry about the IR35 tax investigation
- The contractor may claim costs
Although the contractor cannot claim as much expenses as if you could still require a limited amount of expenses in the framework of a company providing personal services, for example, you can require travel expenses, expenses for the night if you are leaving, pensions, professional organizations and fees to charities that are not taxed.
A good future for umbrella contractors
Contractor umbrella companies sprang out of nowhere in 1999 after the introduction of the IR35 tax to gain a 14% market share of freelancers and almost certainly an even larger market share of IT contractors.
Many people thought this was a temporary phenomenon and that it was just a way to undermine IR35 legislation to allow contractors to claim some tax on their expenses, usually around 5%.
In fact, the government cracked down on the so-called managed service companies, which they claimed had a special refusal to provide contractors with higher costs.
Many of them have already gone out of business after the repression or were forced to change their business model.
Contractors and market experts thought it was only a matter of time before the government turned its attention to the rest.
Experts are wrong
However, it seems that the experts were wrong. There are two reasons for this.
Firstly, the government is very pleased that 200,000 contractors pay a much higher tax rate than before and seem to be happy to allow them to claim a small amount of expenses.
In addition, it is much easier to legislate for several hundred wagons than for hundreds of thousands of contractors. It is much more manageable for them.
Contractors also remember that in their IR35 review, the government oversight body said that many contractors would leave the trolleys and return to limited liability partnerships, and the government does not consider this a good thing.
So, will there be more or less contractors in the future?
Since it is beneficial for the government to have as many contractors as possible rather than joint stock companies, it should be said that the government is likely to act in its own interests in the future. It can be expected that over 5 years there will be many more contractors at Umbrella Companies.