On 26th April Glen Reeve, with the support and sponsorship of ContractorUmbrella, will be running for 26 miles; just imagine running 26 miles! For most of us the thought of running for a bus is exhausting – the marathon course is further than the distance between England and France ! So why is Glen doing this? And more to the point why is he doing it when he’s over 50 years old (sorry Glen).

This is why: In February 1987 Paul O’Gorman died of Leukaemia; he was just 14 years old. Within the same year his sister Jean was also killed by Cancer, a devastating blow to the O’Gorman family. Despite these tragedies Paul and Jean’s parents began fundraising so that they could help other children with Leukaemia and also fulfill a promise that they had made to Paul before he died. Paul continues to inspire the work of CHILDREN with LEUKAEMIA. What started as a small memorial charity is now the UK ’s leading charity dedicated to the conquest of childhood leukaemia through pioneering research, new treatments and the support of leukaemic children and their families. The incredible scientific advances made have ensured that 4 out of 5 children now survive Leukaemia but, alarmingly, incidence of Leukaemia have been rising steadily for the last 50 years. Glen would like your help to raise money for this wonderful cause and therefore we would ask you to donate as much or as little as you can afford.

Please click the following link and ContractorUmbrella will match all donations made pound for pound – http://www.contractorumbrella.com/charities.html

In 2010 our members of staff will be either running, walking, jumping out of planes or hosting an online silent auction depending on their age, fitness, ability and degree of sanity. To make things even more interesting (or possibly dangerous) we are asking for suggestions for fund raising events that we can carry out over the course of the year.

ContractorUmbrella’s chosen charities for 2010 are Children with Leukaemia and Cancer Research UK and we are determined to raise as much cash as possible for these 2 incredibly worthwhile organisations.

For more details or to make a fundraising suggestion please visit http://www.contractorumbrella.com/charities.html.

I for one, consider it good news that HMR&C are considering asking for receipts to prove scale rate expense claims are warranted. This might help to put an end to the misleading marketing claims made by certain Umbrella Companies who are making promises of 80 or even 85% of their gross income value.

HMRC originally introduced scale rate charges to reduce the burden of reimbursing costs to their own staff. If the staff member has incurred a cost during the course of their job, that is greater than the cost that they would normally incur, then that person is entitled to claim the full scale rate allowance regardless of their actual expenditure. Any false claims would mean that the employee would run the risk of dismissal, criminal proceedings, imprisonment etc.

The same scale rate allowances have been applied to Umbrella Company dispensations and some are using it as a carte blanche to allow all of its contractors to claim the full allowance, regardless of whether or not the criteria above has been met.

If these expenses are processed without asking the contractor whether or not they have actually spent that money, the individual, not the Umbrella Company, may be liable for an additional income tax liability. To quote directly from HMR&C’s website:

 “Scale rate payments are only paid when the employee has incurred an allowable expense. A scale rate payment which is paid irrespective of whether the employee has incurred an allowable expense is simply a payment of earnings”

This means that, if an Umbrella Company is automatically processing a daily allowance for their employees as an expense, when they actually haven’t spent that money, HMR&C will consider it to be earnings and therefore subject to tax.

Therefore, before you join an Umbrella Company, you should ask them whether or not they process daily amounts automatically and whether these amounts are subject to tax relief or not. Just 6 months of claiming £35 per day expenses for costs that you haven’t incurred could leave you with a tax bill of £1,820.00.

If you are going to use the services of an Umbrella Company to handle your pay, why would an estimated take home pay figure be more important than the service you are likely to receive?  

I personally blame the unscrupulous Umbrella Companies who suggest that they can net contractors a higher take home pay. This is simply not true; ALL umbrella companies work in exactly the same way. Umbrella company calculators that show a high net pay either operate a scheme outside of PAYE or they assume high levels of expenses which you may or may not be entitled to claim.

Umbrella companies that are allowing large amounts of un-receipted expenses to be claimed that haven’t been incurred are not compliant and are giving HMR&C ammunition to target the industry. This approach is resulting in more and more contractors ringing round simply asking for net pay ‘quotes’ and forgetting the important facts such as fees, customer service and reputation. 

Basing your choice of Umbrella Company purely on who can offer the highest pay is fine…until you have a problem or query. Isn’t it going to be frustrating when you are kept on hold for ages, you can’t ever speak to the same person twice or you have to wait days for a response to your queries?

Don’t get me wrong, I can totally understand that people want to keep as much of their hard earned cash as possible but the only ones who are going to lose out by using these companies are the contractors.

How do they get away with it I hear you ask? Well the Umbrella Company is miss-selling their dispensation which I have explained here: blog. They use the sales hook of ‘maximise your net pay’ to reel in contractors that are new to the industry and unfortunately don’t know any better. This is extremely bad practice on the part of the Umbrella Company because the contractor could be building up a large tax liability, probably without even realising it.

The HMR&C investigation window is 6-7 years and they can ask you to substantiate your expense claims at any point within this time frame. If you are unable to prove you have incurred the costs you have claimed, you will have to pay back all the tax you have underpaid plus a fine.  Any claim of protection from an HMR&C investigation is again sales patter and simply untrue because any unpaid tax, interest and fines will be payable by you the contractor and not your Umbrella Company.

The simple truth is; the only difference between the net pay offerings of one Umbrella Company to the next should be the fees they charge for their services.

Through an Umbrella Company you may be entitled to claim certain business expenses that have been incurred in the course of your contract but these should be exactly the same, regardless of the company you use, because it is HMR&C that dictates what expenses you can claim and not the Umbrella Company!

Our website has some top tips to bear in mind when selecting your Umbrella Company.

One of the most common questions that I am asked is how an umbrella company can ‘maximise’ a contractors’ earnings; the answer is that it can’t. All umbrella companies operate in exactly the same way and all are governed by rules and regulations that are applied by HM Revenue and Customs.

That said, I am sure that many of you will have seen adverts promising 80% or even 85% take home pay. Sadly, unless you plough almost all your income into a pension or you have geniune expenses of 50% of more of your earnings, this will simply not be possible. Why? Well, if you are employed by an umbrella company you must, according to HMR&C legislation, be paid via PAYE which means deductions will be made for income tax and employee’s national insurance. The standard income tax rate is 20% (after allowances) and the NI rate is 11% (again, after allowances). As your umbrella company is registered as an employer it is legally obliged to pay Employer’s national insurance contributions which will be deducted from the contract rate agreed with your agency/client before your salary is paid; employer’s NI is 12.8%. Your umbrella company will also deduct a fee from your contract rate; this will range from about £20-£30 per week.

If you consider all these deductions you will realise that a promised take home pay of 85% would be virtually impossible to generate.

Employees of an umbrella company are entitled to claim business expenses. These have to be supported by receipts and they have to have been incurred wholly and exclusively as a result of the contract. The expenses are processed as a tax benefit which means that your taxable income is reduced in direct proportion to the value of the expenses. Therefore, the more that is claimed in expenses, the higher your take home pay. HOWEVER, if you claim an expense without incurring the cost you will be guilty of TAX AVOIDANCE.

ContractorUmbrella have worked out that, in order to generate a net return of 85% on their earnings, a contractor with a contract value of £300 per day would have to incur £173 per day in expenses. In other words, they would have to spend £3,748.00 per month.

If expenses are claimed through an umbrella company that are not genuine it is viewed by HMR&C as tax avoidance. Claiming for expenses you haven’t incurred will leave you in big trouble if investigated. You would be expected to pay back all the underpaid tax, a penalty usually of similar value and interest. Unfortunately ignorance isn’t bliss – you won’t be able to excuse yourself by saying you were given bad advice.

So, the moral of the story is – if it seems to be true it very probably is! If you ask an umbrella company for an estimate of your tax home pay, specify that you do not want ANY expenses included in the calculation; the only difference between quotes should then be the difference in fees (oh and, of course, service)

There have been so many questions by new contractors about umbrella companies and the way that they work that I thought I would start a blog to try and answer the most common questions. Firstly and most importantly all umbrella companies are governed by the same rules. All will process your payments through PAYE (Pay As You Earn) as the assumption is always made that you will be working inside IR35. The umbrella company will pay you a salary, based on your contracted rate less the employer’s national insurance that they are obliged to pay. From this they will deduct income tax and employee’s national insurance both of which are payable to HM Revenue and Customs. More information on income tax can be found here: http://www.hmrc.gov.uk/rates/it.htm and here: http://www.hmrc.gov.uk/rates/nic.htm for national insurance.

You will be advised that you can claim expenses which will either be charged direct to your client or will be processed as a tax benefit. You can only claim expenses which are approved by the Inland Revenue. This means that it does not matter which umbrella company you use, your net earnings should be the same provided that all Inland Revenue regulations have been followed. The only difference should be the fees that your umbrella company charges.

Most umbrella companies will mention a ‘dispensation’ and the term is sometimes used in advertising. A dispensation will not tell you which expenses can be claimed it is merely an accounting tool for your umbrella company. Under normal accounting practise all expenses that a company processes have to be recorded on a P11D form which is sent to the Inland Revenue; an umbrella company’s dispensation means that this form will not be required for those expenses that they have listed. The dispensation does not relieve the contractor of any responsibility at all regarding the provision of receipts – they will be required if you are the subject of an Inland Revenue investigation. Nor does it mean that you can legitimately claim more expenses through one umbrella company than another, they have to be Inland Revenue approved and must be supported by receipts. To quote the Inland Revenue:

“… contractors cannot automatically claim £21 per day (or any other amount) for each day they are at work. It is also worth saying the Inland Revenue would not give general approval of a company’s expenses policy. A dispensation would never cover large amounts of unsupported expenditure”

Most umbrella companies will also have a calculator on their websites to give you an illustration of your earnings. You may find that they will return different results. If a calculator does not ask you for details of your expenses it may assume a figure based on some sort of average, therefore the figure you are quoted will only be accurate if the figure assumed is exactly the same as the expenses that you incur. Therefore, you should always check that you are comparing like with like and, remember, the calculators are for illustration purposes only and will always give an estimate rather than a quote.

During your research you should check whether there are any ‘hidden costs’ and you should obtain confirmation in writing.Lastly, if the scheme being offered seems too good to be true then it very probably is and you should contact the Inland Revenue directly if you are unsure about any of the information that you are being provided with

If you have researched umbrella companies you will probably have come across the term ‘Dispensation’ or even ‘Special Dispensation’. It is a word that, for some companies, forms the basis of advertising and marketing campaigns e.g. ‘Contractor dispensation – high take home pay’ or ‘HMR&C approved expenses dispensation’. So, will an umbrella company’s dispensation increase your take home pay and does it prove that their expenses policy is approved by the HM Revenue and Customs?

NO. I’ll repeat that – NO.

All companies can apply to HMR&C for a dispensation, it is not something that is only granted to umbrella companies and its main purpose is to save accountants time. Normally, when an employee is paid for an expense an accountant will file a record of it on what is called a form P11D, he will also be required to have the employee’s receipt to support the expense. This information is then sent to HMR&C. However, if you have a dispensation you are not required to see employees’ receipts or to file a P11D for all those items detailed within it. For instance, a company may have a dispensation for accomodation costs of £50 per night; if an employee spends £50 or less on a hotel per night the expense will not need to be recorded on a P11D and the company will not need to see a receipt.

So what does it mean if you are a contractor working through an umbrella company? Well, actually it’s probably easier to tell you what it doesn’t mean:

It doesn’t mean that you can claim, as expenses, all the items that the umbrella company has listed on their dispensation i.e. if you don’t stay away from home overnight you cannot claim accomodation costs.

It doesn’t mean that you can claim the value listed on the dispensation regardless of how much you have spent i.e. if you spend £40 on a hotel, you claim £40.

It doesn’t mean that you can claim more expenses through one umbrella company than another. Remember the dispensation is only to minimise form filling, it is not a guide to allowable expenses.

It doesn’t mean that HMR&C have approved an umbrella company’s expenses policy. The expenses that any employee can claim are determined by HMR&C not by an umbrella company.

It doesn’t mean that you are safe from investigation by HMR&C. Just because your umbrella company doesn’t need to produce your receipts in order to process your expenses, it doesn’t mean that you don’t need receipts. You Do. You will also need to save all your receipts for a period of 7 years; if you could not prove that an expense you claimed was legitimate HMR&C would force you to pay back any and all underpaid tax. Oh, and they may issue penalties for tax avoidance as well.

Umbrella companies are responsible for contractors’ tax affairs and therefore should have a solid accounting background. ContractorUmbrella is sister company to SJD Accountancy, the largest specialist accountancy firm in the UK, so you can be sure that any advice given can be trusted.