Umbrella Company Now The Taxman’s Favourite Vehicle For Contractors

By Author: nitin chauhan
Total Articles: 16
Comment this article

On May 7th HMRC published its new IR35 Business Entity Test which shows whether contractors are at high, medium or low risk of being caught by IR35. There is a scoring system as follows:-



0-9 Points – High Risk
10-19 Points – Medium Risk
20 and above – Low Risk



You can take the test here IR35 Business Entity Tests



As it stands most contractors would be at high risk of being inside IR35. As HMRC devised the points system it is fair to conclude that the taxman is trying to chase contractors down the Umbrella Company route. They sprung up in 1999 after the IR35 Law was placed on the statute books. This was set up to make those contractors whom HMRC saw as being ‘disguised employees’ pay their full rate of tax.



Previously, most contractors operated using a Limited Company where they could claim for all sorts of expenses against tax. The IR35 tax was set up by the Labour government in 1999 and there were hopes that the Conservatives, if they came ...
... to power, would abolish it.



They promised the Professional Contractors Group that they would ‘look at’ IR35 again. Indeed they did look at it and decided that they would keep it. The main reason given was that if it was abolished many contractors would leave their Umbrella Companies and set up Limited Companies again.



As the difference in the tax and National Insurance contributions that HMRC gets from an Umbrella Company contractor compared to a Limited company contractor has been estimated at £10,000 per contractor, the Government didn’t see this as a good thing. That would be £2bn worth of revenues disappearing immediately.



Indeed the Conservative-led Coalition Government went further and said in the last Budget that they would strengthen IR35 and have now hired 36 Compliance Officers at a time when they are implementing massive cuts elsewhere, splitting them into three teams based in Salford, Edinburgh and Croydon, to target contractors for more tax.



The IR35 Test and scoring system will help chase contractors out of Limited Companies and into Umbrella Companies, which have 200,000 contractors in them but that is out of a total of £1.6m freelancers in the UK. The Government would like to see lots more contractors make the jump from their Limited Companies. Many will want to sleep well at night without wondering when the knock in the door is coming followed by an investigation lasting years followed, potentially, with seven years back taxes, interest and fines to pay.



If this is successful, and the new hit teams of Compliance Officers will be out to make it successful, the Government will have a nice new stream of revenue without even changing the laws. However, it will be contractors who miss out financially.



Gerry McLaughlin is the CEO of UK IT Contractor umbrella company website www.ITContractor.com.