Contractors choosing umbrella companies should be wary of those that market themselves as “IR35 compliant”, “HMRC-approved” or who claim they have special expenses dispensations.
While umbrella companies offer a vital service to many freelancers, some make misleading claims in their sales and marketing material. Contractors should always complete due diligence and avoid companies making false claims.
Contractors throughout the UK are fearing the implementation of IR35 in the private sector in April 2021 and some umbrella companies have sought to prey on these fears, claiming that, by working under them, contractors will be“IR35 compliant”.
Simply put, IR35 legislation does not apply to umbrella companies. Every contractor working with an umbrella company is that company’s employee. As such, they will pay income tax and National Insurance like any other employee, and IR35 is totally irrelevant to them.
Umbrella companies saying they are “IR35 compliant” is both misleading and an incorrect use of the terminology.
While umbrella companies are required to fully comply with HMRC rules and guidelines and often work closely with HMRC inspectors and compliance units, those that describe themselves as “HMRC-approved” are, again, being deliberately misleading.
HMRC does not bestow approval on companies simply for complying with tax, employment and company law. HMRC is, in fact, expressly not allowed to confer approval on service providers, as it is required to maintain supplier-neutrality and not put any firms at a commercial advantage.
If contractors want an umbrella company that has received a seal of approval for its conduct, look for accreditation from a respected voluntary code of conduct, such as the Freelancer and Contractor Services Association (FCSA).
“Special expenses dispensation”
Some umbrella companies may use dispensations in their marketing, seeking to claim that dispensations they have been granted mean that their contractors can claim expenses without receipts.
Some companies may even say that their dispensation means contractors don’t need to incur an expenditure in order to claim.
In fact, dispensations merely relieve an employer, such as an umbrella company, of the need to provide individual P11D’s for every employee in order to account for the reimbursement of tax-free expenses. They do not mean that contractors don’t need to keep receipts and failure to do so can result in contractors getting in trouble with HMRC.
The takeaway point is that contractors should always conduct thorough due diligence on an umbrella company before making their decision and committing to a contract. Companies making misleading marketing claims like the ones listed in this article should always be avoided.