Umbrella Company

Many freelancers have to decide whether they take the Umbrella Company route or the Limited Company route. The Professional Contractors Group produced an IR35 Business Entity Test for  HMRC which shows whether a contractor is caught by IR35 or not. It has to be pointed out that it was HMRC who devised the scoring even though it was the PCG who were the main players in forming the questions. Take the IR35 Test here. As you can see most contractors would currently be at High Risk of being caught by IR35.

Although this is not definitive and the law hasn’t changed, HMRC are using this test more and more to decide if contractors are caught or not. Indeed, they are sending thousands of letters out to contractors asking them to prove they  are at Low Risk of being inside IR35 and advising them to take the test. They have a month to prove it or face an investigation. Contractors who fail the test and are at High Risk of being caught by IR35 would be better off exploring the http://www.itcontractor.com/umbrella-companies/which_umbrella_company option. Those at Low Risk would be better with a Limited Company and those at Medium Risk would be well advised to get themselves to Low Risk.

Contractors caught by IR35 would be better off joining an Umbrella Company rather than just paying the full IR35 tax. It would at least allow them to claim some expenses against tax. The Company will at least allow them to claim for travel expenses and accommodation too if they are staying away from home. At one time the Umbrella Company was looked on as a way of avoiding taxes but the taxman is now comfortable with them and some people even think the brolly is now the preferred vehicle of the taxman.