IR35 and MSC legislation

Umbrella companies sometimes use these scary sounding tax words to market themselves. Recently one of the umbrella companies got an expensive accreditation to prove that they are fully MSC compliant. These are just marketing tricks. Mostly there are straight forward differences between umbrella company and MSC.

MSC are composite company structures. In these structures individual contractors will be the shareholders of the company but do not participate in the management of the company. Company will be managed by service provider. But the contractors would receive salary and the dividends. This arrangement is substantially different from that of an umbrella company. In umbrella company contractors would be employees and do NOT receive any dividends.

Umbrella companies will not fall under the definition of MSC. For a company to be a Managed Service Company it must fulfil all four conditions of Section 61B (1), Chapter 9, Part 2 ITEPA. Umbrella companies do not satisfy the third condition. i.e., “The payments received by the worker are greater than they would have received if all of the payments were treated as employment income of the worker relating to an employment with the service company.”[3] As umbrella companies do not pay dividends and consider whole income as employment income. They are not Manage service companies.

Well in nutshell, any umbrella company that doesn't pay you dividends is IR35 and MSC safe. None of the umbrella companies we know of in today's market will pay you dividends, hence they are all safe. Ganumbra is no exception to that.

Net pay magic

This is a good old but a popular trick played by many small umbrella companies. They promise you a magical sky scraping percentage take home, starting from 90 percent.

To achieve the higher net pay, these companies play a small ploy. They pay you fixed chunk of your earnings as expenses every month as allowance without asking for bills. Any unused allowance becomes your personal tax liability to pay. If HMRC asks what these expenses are for? it's your responsibility to show bills and prove that they are the allowed expenses under the law. Otherwise you need to pay penalty.

Though it looks like higher net pay, it's logically same as taking your salary without paying any tax. On top of this you will be paying fee for your umbrella to do this!!

Dispensation flexibility

You may see some umbrella companies advertise their so called “Dispensation Flexibility”. They make you believe that they have a special agreement with HMRC to pay you expenses flexibly without asking for bills. However they add a statement that you should retain bills for HMRC verification.

To be frank, dispensation doesn't add any value to you as a contractor. It's a provision in HMRC to reduce the paper work of the employer. Dispensation is a notice from HM Revenue & Customs (HMRC) that removes the requirement of employer (umbrella company) to report expenses and benefits to HMRC. Umbrella company can also agree to pay the expenses by scale rates. This requires the company to conduct a survey of employees expenses and pay them based on rates derived from the survey. If the umbrella pays by scale rates they need not have to verify the expense bills (receipts) and report it to HMRC. The onus is on the contractor to maintain the receipt and submit it to HMRC. If your umbrella company verifies your bills and retains it, it will become their responsibility to produce them when needed and defend your case in the event of investigation. In fact that will be your first line of defence for HMRC investigations.

If your umbrella have dispensation agreed and doesn't require you to produce bills, you will be losing your first line of defence. Then what for are you paying your umbrella? Just to calculate and pay your taxes?? any payroll software can do this with almost 1/10th of the price you pay to umbrella.