Contractors' Questions: Is an 'alternative' brolly worth it or worrying?

Contractor’s Question: I’m an ex-contractor who, upon signalling an interest in my old sector with some former colleagues, has been approached by a “tax-efficient” umbrella company – which also calls itself an “alternative” umbrella company.

The company is not offshore but can somehow manage to pay me a net weekly pay significantly higher than the ‘standard’ umbrella company I’ve decided to use.

I spoke to the alternative umbrella directly and they say they achieve this by applying slightly different rules than the ‘standard’ umbrella company I’ve started with. The former insists they are totally compliant with HMRC guidelines and UK laws and still manage to provide such a high take-home pay. Does this umbrella sound worthwhile or worrying?

Expert’s Answer: Let me start by saying that the ‘University of Life’ has taught me that if something looks too good to be true, then it almost certainly is. Now supplement that with the fact that were I to be still employed by what was the good old Inland Revenue (now HM Revenue & Customs), I would regard anything advertised as ‘tax-efficient’ with suspicion. It appears that you do too.

To top it all, and without wishing to get drawn into a debate about ‘alternative medicine’, I think I’d want to know (if I were you) what is special about an “alternative” umbrella company! Umbrella companies have been around for some considerable time and I can’t help but think that if they could secure significantly higher pay for their employees by applying slightly different rules then all umbrellas would be doing it! Of course in your instance, the clincher is the claim that it’s all totally compliant with HMRC guidelines and UK laws. Where’s the evidence for that statement? Remember; most tax cases involve parties that thought that was indeed the case, only to be disappointed when the courts found otherwise.

You are already with an umbrella company and regarding them – your existing employer, ensure:

· that you have a secure contract of employment with the umbrella company;

· that the umbrella company properly accounts for employer’s National Insurance Contributions;

· that you are content with the level of the umbrella company’s margin, especially if there are hidden extras;

· that other than employer’s NI and the umbrella company’s margin, the rest of your contract earnings are paid to you and subjected to PAYE;

· that the umbrella company only allows expenses that are actually incurred and would have been allowed by HMRC had the claim been made to them direct.

In short, comparing umbrella companies, the only difference in your take-home pay should be attributable to differences in the umbrella company margin. And not dissimilar to how I opened my answer by saying that ‘if it looks too good to be true…,’ with umbrella companies - whether they describe themselves as ‘alternative’ or ‘standard’ - remember another truism, ‘you get what you pay for!’

If you still feel drawn to this ‘alternative’ umbrella company why not ask for full details of their “slightly different rules” and then run those details past HMRC asking for their assurance that everything is fully compliant. I’m sure they’ll be interested!

The expert was ‘Roger the retired taxman,’ an adviser to trade body All Umbrella Companies Are Equal.

Editor’s Note: Related Reading -

Contractors, don’t be fooled by imposter umbrella companies

How umbrella contractors can understand their payslip

Will the current umbrella company model continue?

Monday 2nd November 2015