An umbrella company is a company that acts as an employer to Agency contractors who work under a fixed term contract assignment, usually through a Recruitment Employment Agency in the United Kingdom. Recruitment agencies issue contracts to a limited company as the agency liability would be reduced. It issues invoices to the recruitment agency (or client) and, when payment of the invoice is made, will typically pay the contractor through PAYE with the added benefit of offsetting some of the income through claiming expenses such as Travel, Meals, and Accommodation.
- An umbrella company processes timesheets received from the contractor, then issues an invoice to an agency who invoices the client for payment.
- The client is effectively the company for whom the contractor works. This may be within any industry and across all levels of employment.
- The client often elect to use contractors as it affords them the ability to temporarily augment their staff or capability without the burden of the legal requirements associated with permanent employees (PAYE, NI, Sick pay, insurances et al.). Using contractors also facilitates special skills and typically provides the advantage of a broader skill set as the contractor has typically worked with a myriad of companies and organisations during prior contracts
The agency performs the recruitment process on behalf of the client.
- Some agencies will provide a PAYE scheme as part of their service. This alleviates the requirement for the umbrella company but requires additional capability within the organisation including professional accountants and adherence to fiscal laws. Most agencies elect to utilise an umbrella company.
- The umbrella company provides payroll services on behalf of the contractor and bills the agency (who in turn bills the client) for work completed by the contractor. The umbrella company provides all PAYE (Pay As You Earn) and National Insurance returns on behalf of the contractor.
- The contractor completes the actual work, completes a timesheet and submits this (typically via fax or secure web portal) along with expense claims to the umbrella company.
- All umbrella companies use the same PAYE calculations to ascertain how much tax should be paid. The only difference between Umbrella Companies will be the fee that they charge and the level of service that they offer to their customers.
- Some of the most common “allowable” expenses include: Mileage & general travel expenses, Hotel & accommodation expenses and Professional Subscriptions. Food and subsistence is rarely allowed to be claimed, as it is the HMRC’s opinion that you would eat regardless as to whether you are working or not. The exception to this rule is if you were staying away from home as part of your work.
- Whilst many of the umbrella companies advertise similar offerings, much of the detail should be checked by the user. Often expenses are used as a selling point with potential abuse of “dispensation” (HMRC issue documentation to employers as a more effective way to record Expenses rather than as a method of generating more income) agreements. It is the independent contractor who will be liable should HMRC decide, for instance, that expenses have been incorrectly claimed. A dispensation is simply a working agreement between a company and HMRC. It is a cost saving mechanism for HMRC that helps them reduce the number of tax inspectors.