HMRC Umbrella Company

The HMRC Umbrella Company relationship is a complicated one. IR35 was set in place in 1999. It was set up to make ‘disguised employees’ pay their full rate of tax. The Government was responding to the scandal where companies were laying off long term employees on the Friday and hiring them back as contractors on the Monday. The Government, quite rightly, saw these contractors as disguised employees. It was just a ruse for avoiding tax. The employer didn’t have tp pay any of the disguised employee’s taxes or NI contributions. The disguised employee paid himself or herself in dividends rather than pay the top rate of tax. It was a win-win situation – but not for the taxpayer or the Government. It was a lose-lose-situation for them.

New Laws

However, as Governments are wont to do, they over-legislated. The new laws dragged long term contractors into the IR35 net as well as all those disguised employees. The Professional Contractors Group was set up to fight IR35 as a result. They created a petition. They marched on Parliament. THey raised money to fight the Government in the courts. Whilst losing the main battles in the High Court, the PCG managed to win lots of minor battles at the Special and General Commissioners which confined IR35 more than a little. HMRC lost case after case at this level.

IR35

IR35 spawned a new entity – and that was the Contractor Umbrella Company. Those contractors who were caught by the new IR35 tax had a third option. The IR35 tax itself doesn’t bring in much in the way of tax. However, by chasing contractors into this new entity, it gets a lot more tax indirectly. Using this method contractors can claim some basic expenses to be offset against tax. These would include travel to work and the costs of overnight accommodation.

You would think that HMRC would prefer contractors just to pay the IR35 tax rather than being part of these new entities. However, the HMRC Umbrella Company relationship is symbiotic. It suits HMRC for a few hundred brollies to extract their tax from multiple contractors and send it to them. That is preferable to having to deal with hundreds of thousands of contractors individually and their tax returns. HMRC are happy to give up a little in the way of allowing expenses in order to achieve this.