A company that hires or contracts with a client’s (typically temporary) staff is an umbrella company. The recent implementation of IR35 and off-payroll working laws in the United Kingdom has made umbrella companies an increasingly viable compliance solution.
Umbrella companies (called ‘umbrella agencies’ and ‘umbrella organizations’) are comparable to but separate from PEOs. Whether their concentration is domestic or international, umbrella companies are more prevalent in the United Kingdom and Europe, while PEO services are more prevalent in the United States and Asia.
Why Use an Umbrella Company?
Independent contractors may use an umbrella firm for numerous reasons. Starting as a contractor is easier than forming an LLC, which might be confusing.
If you want to contract for a short time, an umbrella company is easier than forming a limited company and dissolving it afterward.
IR35 contract – In that instance, you may prefer to work through an umbrella company because it will reduce the limited company tax benefits and administrative load. Your end client or recruitment agency may only work with you through an umbrella firm due to IR35.
The law applies even if you employ British workers in the United States. The off-payroll working regulations apply to any UK resident contractor who trades via a UK-based limited company, regardless of where they operate.
Therefore, IR35 regulations will apply if a contractor works for you in the United States, which has a “Reciprocal Agreement” (RA) with the United Kingdom addressing tax and social security.
You only pay the umbrella firm’s margin during the weeks you are employed.
When you are unemployed, you are not required to pay. Using a limited liability corporation would require you to pay your accountant regardless, but at a lower rate.
How Does an Umbrella Company Work?
Umbrella companies are third parties paying independent contractors for services to an agency or customer. An umbrella will invoice the client or agency for the amount and pay the contractor after deducting taxes and National Insurance.
The typical procedure for joining an umbrella company is as follows:
1. Even if your agency recommended a particular umbrella company, you should thoroughly investigate its suitability before signing a contract.
2. Contact via the official website.
3. Sign a contract with the umbrella company
4. Next, they will sign a contract with your recruitment firm.
5. Perform your duties and submit your hours for approval to the client before submitting them to the umbrella firm for processing.
6. The umbrella firm will pay you after billing the agency or customer with all applicable deductions and expense allowances.
7. After the tax year, you will obtain a P60 or P11D and will be able to reclaim any remaining expenses.
Key Benefits of Umbrella Organization Arrangements
An umbrella company acts as a liaison between the client, the recruitment agency, the worker, and itself.
Utilizing an umbrella company has many potential advantages for businesses that are expanding overseas, including:
Compliance
Engaging an umbrella company guarantees that your overseas operations are legally compliant, which reduces the likelihood that you will have to pay back taxes, mandatory contributions, and penalties.
For instance, they assure full compliance with termination and redundancy rules and all applicable deductions.
Potential tax benefits for workers
In other instances, the umbrella company employs a limited company owned and run by the individual worker rather than employing the individual worker directly.
While this arrangement is not risk-free, it may permit the deductibility of additional expenses and a potential reduction in taxable income.
Note that the legality of other umbrella agreements varies from country to country, and you should seek expert counsel before entering into a specific arrangement.
Umbrella Company – Advantages
Both companies and workers benefit from umbrella companies.
Benefits for companies
A business that hires workers through an umbrella company also gets some benefits.
Some organizations may prefer to collaborate with employees of umbrella companies as opposed to engaging independent contractors or direct employees since this structure can benefit them:
Promote global employment:
If a company wishes to hire in another country, it may deal with an umbrella company there. The umbrella company can find legal contractors abroad via a transitory setup.
This is advantageous if you wish to hire someone for a project or consulting but not permanently. You can hire contractors directly in these scenarios.
Avoid worker misclassification:
Countries have laws that distinguish between contractor-client and employee-employer relationships. You could be penalized or sued if you hire a contractor, but the government determines they should be an employee instead.
Employers must now ensure that contractors aren’t misclassified under IR35. When you hire through an umbrella company, you don’t have to worry about misclassifying them.
Benefits for workers
Being an employee of an umbrella company has some advantages over being a contractor who works independently.
The main reasons why workers choose this option are:
Ease on taxes:
You only pay the margin to the umbrella company during the weeks you work. If you are not working, you have no financial obligations.
When working through a limited company, on the other hand, you will be required to pay your accountant no matter what, but they may charge you a lower cost.
Provide benefits:
Workers could get benefits they wouldn’t get as contractors if they worked for an umbrella company. In some countries, benefits packages may include pension plans and health insurance.
Umbrella Company – Disadvantages
There are also some considerable downsides to working with an umbrella company that both companies and workers should consider before making a deal.
Disadvantages for companies
Employing independent contractors under an umbrella company rather than directly as employees has significant drawbacks. In this regard, the following are some downsides of the umbrella company model:
Incompatible with conventional job arrangements:
You shouldn’t use an umbrella company if you want to hire exceptional employees permanently. Independent contractors can sign a contract for a specific duration but aren’t compelled to remain forever.
This personnel can choose how they do their work because they are not conventional employees.
Often connected to staffing firms:
Working with an umbrella company typically involves working with a staffing firm. This means you will engage with a recruitment agency to provide you with personnel and use an umbrella company to pay them.
This structure can feel cumbersome compared to recruiting staff directly and restricts your ability to select employees. If you desire greater control over your recruitment, you should avoid umbrella businesses.
Limited to HR basic functions:
Remember that umbrella companies offer restricted services if you plan to hire globally. They can pay employees, keep records, and give legal benefits. They are not, however, a resource for worldwide expansion, as you would find with an Employer of Record.
Disadvantages for workers
Workers must consider various risks before employing an umbrella company, freelancing, or becoming a client’s employee. Among the disadvantages of dealing with umbrella companies are the following:
Temporary work:
Working for an umbrella company may benefit employees over being independent. Only contract work is allowed. Even if the umbrella company hires people, they work temporarily for several clients.
If this sort of employment is less desired than long-term employment with a single organization, the person should seek a more traditional job.
Offers fewer tax benefits:
As employees, workers cannot deduct as many expenses as self-employed individuals under this paradigm. If they are accustomed to deducting work-related expenses, they may lose this flexibility upon becoming employees.
Some umbrella companies say they can assist workers in maximizing their take-home income through “tax-efficient” tactics, yet they may be engaging in tax avoidance. Employees may owe overdue taxes, interest, and other penalties.
FAQs
Q1. How do I select an umbrella company?
There are several important elements to consider while selecting an umbrella company.
These consist of:
- Fees
- Quality of service
- Speed
- Industry reputation
- Testimonials
- Compliance and qualifications
Q2. What is the fee to join an umbrella company?
Typically, there is no price associated with joining an umbrella business.
Find an umbrella company that conforms with HMRC and charges no joining cost.
Q3. What expenditures can I deduct as an independent contractor?
In general, only reimbursable expenditures are paid to umbrella employees; these are reimbursed on top of their weekly or monthly income upon submission of the appropriate documents and permission by the client firm.
This drastically restricts the expenses to claim, although it is crucial to note that if you have purchased something strictly for work-related purposes, such as a uniform or tools, you can still claim tax relief at the end of the fiscal year.
Q4. Exist unusual situations in which umbrella employees may claim tax deductions for expenses?
Again, contractors are now subject to the same standards as permanent workers. Therefore the same restrictions apply. It is doubtful that a permanent employer would cover meals or daily commutes.
Still, they may cover travel costs for mobile workers or one-time excursions to other places for business purposes.
Nevertheless, your recruitment agency, not your umbrella agency, must process all expenses in compliance with the revised standards.
Learn more about an umbrella agency or international PEO
Contact Unison Globus if you want more information about umbrella companies or other cost-effective methods for achieving global expansion. We concentrate on offering worldwide business solutions to organizations that lack current legal entities or require additional office support.
Our global business services enable foreign companies to cut administrative costs, streamline and consolidate payments, and delegate compliance and regulatory problems to local businesses with existing contacts with government agencies.
Contact us to learn more about how we can assist your company’s expansion into numerous attractive locales.