Umbrella companies are popular among contractors and freelancers since they offer a straightforward way of managing their finances. However, they usually have specific tax and National Insurance Contribution (NIC) duties that they must fulfil.
That said, this article will explore the top eight questions that you must ask umbrella companies when it comes to their said responsibilities.
An umbrella company acts as an intermediary between a contractor/freelancer and their clients. The umbrella company processes the contractor’s payments and deducts taxes and NICs before transferring the funds to the contractor’s bank account. They are responsible for calculating and paying income tax, employer’s NIC, and employee’s NIC on behalf of the contractor.
If the umbrella company’s annual turnover exceeds the VAT threshold of £85,000, it must register for VAT. Once registered, they can claim back VAT on expenses, but it must charge VAT on its services as well.
An umbrella company can claim various expenses, such as travel and subsistence, professional subscriptions, and office expenses. However, the expenses must be wholly and exclusively for business purposes and not personal.
The Employment Allowance allows employers to reduce their employer NICs by up to £4,000 per year. However, umbrella companies cannot claim the Employment Allowance if they supply workers to clients who are under the supervision, direction, or control of the client.
The off-payroll working rules, also known as IR35, determine whether a contractor is an employee or self-employed for tax purposes. If the contractor is deemed to be an employee, the umbrella company must deduct income tax and NICs from their payments. The off-payroll working rules apply to contracts with clients in the public sector and medium to large-sized companies in the private sector.
The Criminal Finances Act requires umbrella companies to have adequate procedures in place to prevent the facilitation of tax evasion. This includes training staff on how to identify and prevent tax evasion, conducting due diligence on clients and suppliers, and monitoring transactions for suspicious activity.
The Apprenticeship Levy is a tax that employers with an annual pay bill of more than £3 million must pay. The levy is used to fund apprenticeships. Umbrella companies are not required to pay the Apprenticeship Levy, but they must deduct the levy from their payments to contractors who are employed by clients that are subject to the levy.
The umbrella company must report its tax and NICs to HMRC through Real-Time Information (RTI). RTI is a system that requires employers to submit payroll data to HMRC each time they pay their employees. The payroll data must include information about the employee’s pay, tax, and NICs.
Umbrella companies have specific tax and NIC duties that they must fulfil. These include registering for VAT, claiming expenses, complying with IR35 and the Criminal Finances Act, and reporting tax and NICs to HMRC through RTI. By understanding these obligations, umbrella companies can ensure that they remain compliant and avoid penalties.
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