Ltd to umbrella - ER implications?

[webberg]

For what it's worth, because we deal with a lot of MVL situations as PSCs will have no real role in a post April 2020 world, we have researched the potential for ER to be challenged where the same or similar activity is undertaken as an employee within 2 years of the MVL.

We postulated a contractor using a PSC to sell his/her services to an intermediary and/or end client. He/she then becomes an employee of an umbrella company. (Or a permie at the end client).

By umbrella company, we mean a full on PAYE vehicle and not something that uses the title but actually offers a hidden tax avoidance scheme.

The underlying job/role/set of tasks has not changed but the legal terms of delivery have.

So does the continuing of the activity as an employee after using a PSC, invalidate a claim to ER?

The simple answer is nobody knows.

There is no single, straightforward and reliable answer.

However the balance of opinion from tax advisers, experienced trade bodies, agencies and the like is that the legislation allowing a challenge to ER is NOT intended to operate when the individual claimant is an employee.

I would therefore be confident of defending any such attempt by HMRC to challenge a claim.

It is worth noting that this is an area in which HMRC sees opportunity for abuse and will no doubt examine claims and perhaps invent ways to deny relief that make sense to them but which are unintended by Parliament and not permitted in law. Each situation therefore needs to be considered on its merits.

[Amanensia]

Yeah, that all sounds eminently sensible. Whether HMRC decide they can't resist going after all the MVLs that must be in the pipeline over the next year or so we will have to wait and see!

For the avoidance of any possible doubt, if I do go umbrella, it'll be entirely legit. I have no appetite for dodgy schemes.

[webberg]

For the avoidance of any possible doubt, if I do go umbrella, it'll be entirely legit. I have no appetite for dodgy schemes.

Sometimes difficult to tell unfortunately.

Earlier this year we tested the accuracy and integrity of a number of umbrella companies by setting up the same example for each.

We tested 5, 4 of them belong to one of the recognised bodies and one who was not.

The range of "take home" values surprised us. A spread of around 10% of annualised gross day rate.

In many cases this was created by assuming what we would see as unacheivable levels of expenses or take up of salary sacrifice options. We specified in each case that the umbrella should make no such assumptions, but were told that these could not be "turned off" in their models.

Some of them also hid the fact that their modeled take home would reduce once a tax return was made which would expose the "false" expenses level etc and result in money due to HMRC. Those who did mention it, did so in a line/comment buried deep in the quote.

As a result of the above, we launched a call for a standard template to be used by all umbrella outfits so that the only real difference (the umbrella fee) could be easily identified and all timing issues clearly understood.

Nobody was interested.

So, be careful.

(And yes the non affiliated umbrella was, in our opinion, the most accurate and honest).

[Amanensia]

Thanks for that. I'll take the quoted take-home amounts with a pinch of salt - if I know their fees I should be able to work out the rest myself (using my own realistic assumption of number of days worked, rather than the 52 weeks some of the calculators use!) I'm sure there are some good recommendations on this site.

[webberg]

I'm sure there are some good recommendations on this site.

I'm sure there are.

Look out for one particular trick.

NIC has three rates of charge.

Annual income to £8,632 = 0%
Annual income between £50,000 and £8,632 = 12%
Annual income over £50,000 = 2%

We have found that some will assume that NIC is applicable to ALL income.

Whilst effect is given to the upper earnings threshold and the rate reduces to 2%, the 0% band is ignored and NIC is collected on this.

This is an additional amount collected by the umbrella, i.e. £8,632 x 12% (£1,035.84).

The claim made by some is that if the contract being quoted for is less than a full tax year (usually the case) then it's "not possible" to give effect to the NIL rate band.

I'm not convinced that is correct. You can seek a rebate when the return goes in, but how many do and what happens to the money retained by the umbrella?

I don't know. For all I know the umbrella and contractor settle up once the contract/year is finished.

We did ask, but we did not get an answer that we could reconcile and eventually those we asked stopped responding.

Be careful.

[Amanensia]

Haha, that's a nice trick. I'm an actuary and well used to calcs around UEL/LEL, EE/ER NI rates etc. Lloyds will be publishing a list of umbrellas they will work with soon so we shall see (a subset of FCSA-approved ones, I believe, and I won't treat that accreditation as meaning very much!) I'll also be asking very strongly if Lloyds will be guaranteeing payments - it's not unheard of for umbrellas to go bust...

[BABABlackSheep]

Yeah, that all sounds eminently sensible. Whether HMRC decide they can't resist going after all the MVLs that must be in the pipeline over the next year or so we will have to wait and see!

For the avoidance of any possible doubt, if I do go umbrella, it'll be entirely legit. I have no appetite for dodgy schemes.

If you are forced to go through an agency(e.g. Pontoon) then they have a list of brollys you have to use..apparently.

[Amanensia]

Unclear at this stage. I'm currently direct, but LBG use Alexander Mann for processing payments to most LtdCos, including mine. Whether we get pushed through Pontoon or someone else isn't clear; the information we've been given so far is rather sparse. LBG themselves will deal with any FCSA-accredited umbrella, apparently, but whether whatever pseudo-agency is used will have its own restrictions remains to be seen. No doubt there will be some cosy arrangement somewhere...

[webberg]

If you are forced to go through an agency(e.g. Pontoon) then they have a list of brollys you have to use..apparently.

In a legal sense you cannot be "forced" to use an agency and you cannot therefore be "forced" to use their umbrella.

[webberg]

Unclear at this stage. I'm currently direct, but LBG use Alexander Mann for processing payments to most LtdCos, including mine. Whether we get pushed through Pontoon or someone else isn't clear; the information we've been given so far is rather sparse. LBG themselves will deal with any FCSA-accredited umbrella, apparently, but whether whatever pseudo-agency is used will have its own restrictions remains to be seen. No doubt there will be some cosy arrangement somewhere...

Shop around.

You cannot be forced into anything.