HMRC has issued updated guidance for freelancers working via umbrella companies. The update clarifies several pieces of important information relating to umbrella companies and, according to the Treasury, is intended to address common questions self-employed workers have about working with umbrella companies.
Among the changes are several clarifications, removals of previous sections of the guidance and new additions. Reports indicate that the changes come following pressure on HMRC from several industry figures to provide more information and guidance on umbrella companies.
Significant updates include a clarification over the term “assignment rate”. The clarification confirms that the term refers to a payment made by an employment agency to an umbrella company. HMRC adds that this is sometimes also known as “the limited company rate”.
The guidance also emphasises that National Insurance Contributions (NIC) are to be deducted from the umbrella company rather than contractor pay and that any attempt to deduct NICs from contractor pay are illegal.
A further clarification is that the contractor’s entire “contract rate”, normally the National Minimum Wage plus another payment, is taxable. The guidance also adds that if any amount of the contract rate is listed as non-taxable, this could suggest that the umbrella company is involving the contractor in a tax avoidance scheme.
Significant deletions from the original guidance include a paragraph regarding the different hiring models used by umbrellas and a section relating to IR35 rules, both of which had been described as potentially confusing.
Finally, HMRC has also added a section confirming that contractors are entitled to holiday pay.
In a statement, HMRC said: “HMRC has published guidance to help contractors engaged through umbrella companies understand how they work and how they are paid. This will help address some of the common questions contractors may have regarding umbrella companies.”
Author: Steven English