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Fact and fiction about umbrella companies




Fact and fiction - ContractorUmbrella reveals the truth!

If you are new to contracting you are probably a bit bemused by all the information available on the Internet on IR35, umbrella companies, expenses, dispensations etc, etc, and may be wondering where you should start.

There are lots of myths, and you may hear many contractors say ‘well, my mate down the pub said...’ so we will just take a few minutes of your time to try to make things a little clearer for you.

Myth – A special dispensation with the Inland Revenue means that one umbrella company can allow contractors to claim more expenses than another.

Fact – A dispensation relieves a company from reporting expense payments and benefits on a P11D form. It does not mean that the contractor can claim all those expenses that appear on the dispensation. You can only claim those expenses that you incur as a direct result of and wholly because of the contract. The dispensation will relieve the burden on the umbrella company, of having to produce receipts for all the expenses that their contractors incur. It does not mean that the contractor does not have to retain receipts – you do!

Myth – A subsistence payment is an expense I can claim, without receipts, for being out of the house for more than a certain amount of hours a day.

Fact - A subsistence payment is, by definition, one that does not have to be supported by receipts. The only subsistence payment permitted by the Inland Revenue is £5 per night (£10 if abroad) for each night spent away from home during the course of the contract. All other expense claims must be supported by receipts according to Inland Revenue legislation.
"I can confirm that 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”
Extract from a letter received from the Inland Revenue


Myth – I can claim a meal allowance as an expense

Fact - You can claim actual meal costs whilst you are working at a remote site, away from your normal place of work, or when staying away home overnight but daily claims for meals are not permitted. It is the Inland Revenue's belief that you need to eat regardless of whether you are at work or not so the meal costs are not wholly attributable to the contract.

"The cost of food, drink and accommodation is not in general an expense incurred wholly and exclusively for business purposes, since everyone must eat in order to live..." - Extract taken from the Inland Revenue website www.hmrc.gov.uk/manuals/bimmanual/BIM47705.htm

Myth – My umbrella company charges a high fee but they guarantee that I will take home more of my earnings.

Fact - All Umbrella Companies are controlled by the Inland Revenue. Your tax paid is dependant on your personal tax code, National Insurance contributions are a fixed percentage and you can only claim those expenses that the Inland Revenue approve. Remember, a dispensation means that the Umbrella Company does not need to see your receipts; it does not mean that you don't have to have them! The only factor that should affect your take home pay is the Umbrella Company's fees and whether they retain any money for holiday or sick pay.

Myth – An online calculator only needs my rate to work out my earnings.

Fact – Your net earnings will be affected by your tax code and the expenses that you can legally claim. An online calculator should operate using a standard tax code and should request details of your expenses. Any calculator that assumes a figure for expenses will automatically be inaccurate.

Myth – An umbrella company can pay me a minimum wage and dividends, which will increase my take home pay.

Fact – IR35 dictates the way that you are paid. If your contract is outside IR35 you can be paid in the form of minimum wage and dividends. However, and this is really important, if your contract falls inside you can only be paid through PAYE. You will be liable for income tax, employee’s National Insurance and employer’s National Insurance. If you use a scheme that does not pay you in this way and your contract has been determined as being inside IR35, you are, effectively, committing tax fraud. You would be liable for any additional taxes due and appropriate fines if you were subsequently investigated by the Inland Revenue.

More information can be found here at www.hmrc.gov.uk/ir35/responsibilities.htm

This should help you understand the basics but there are a great many schemes that will promise that your take home pay will be increased if you use them – just remember, if it sounds too good to be true then it probably is. If in doubt contact the Inland Revenue direct, as they will be able to advise you on any aspect of the IR35 legislation.


We hope this has shed some light on what can be a rather confusing issue for many contractors. Please feel free to contact us for further information by visiting www.contractorumbrella.com.
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