In recent years, umbrella companies have become a popular route for many contractors. A more hassle-free, time-saving route than working under a limited company, an umbrella company takes care of tricky tax calculations, admin and paperwork. That means the contractor can rest assured that they meet their tax obligations and need only focus on the contract at hand.

With more contractors utilising the services of umbrella companies for this very reason, more umbrella companies have started to advertise themselves as HMRC approved. But, what does this really mean? Is there such a thing as an HMRC approved umbrella company?

In this guide, Umbrella Broker look at what an HMRC approved umbrella company really means to help every contractor know what to look out for when choosing an umbrella company.

Is there such a thing as an HMRC approved umbrella company?

Simply put, an HMRC approved umbrella company does not exist.

Every umbrella company is considered as and treated exactly the same as any other type of employer by HMRC. Therefore, HMRC has stated that it cannot declare an umbrella company as legitimate or not.

In reality, the only way an umbrella company can be distinguished from the rest is by the services and features it offers. When looking for the best umbrella company, rather than looking for HMRC approval, contractors should therefore instead be looking at the company’s fees, services, benefits and reputation.

However, while no umbrella company can be HMRC approved, there is such a thing as being HMRC compliant. While the majority of companies are HMRC compliant, unfortunately there are some bad apples that are not.

It is crucial that contractors work with HMRC compliant companies in order to avoid landing in hot water when it comes to their taxes. After all, it is the sole responsibility of the contractor to meet and pay their tax obligations. Using the services of an umbrella company who claim they can help save you tax will merely leave the contractor with a big tax bill and possible penalties.

How can you spot a HMRC company that is not compliant?

HMRC have shared a guide to help freelancers and the self-employed recognise umbrella companies that are not HMRC compliant.Familiarising yourself with the following criteria will help every contractor recognise potential red flags from companies that are not HMRC compliant and should therefore be avoided.

These include:

• Processing only part of your salary through payroll: umbrella companies that aren’t HMRC compliant will often process part of a contractor’s salary through payroll and give the remaining figure to the contractor directly. This means that only the fraction processed through payroll has been subject to tax although the full figure is taxable. Although it is the company that has processed the contractor’s pay in this way, it will be the contractor who will be held responsible if they are investigated by HMRC.
• Claiming you can keep 80,90 or 95% of your wages and remain tax compliant: HMRC have stated that this is highly unlikely to be the case due to the fact that the basic rate of Income Tax stands at 20% and National Insurance contributions are also deducted from earnings.
• Paying the contractor through a loan, credit or investment payment: some companies arrange to pay contractors through these payment systems as they are not subject to income tax. Although these companies will try to claim that this is legitimate, HMRC have specifically stated that this is tax avoidance.
• Payment is routed through several other companies before it gets to you: another red flag is when companies channel payments through several other companies before it is paid to you.

Any umbrella company claiming that it can pay contractors in a more tax efficient way is not HMRC compliant, even if they claim to be.

Is there a list of HMRC approved umbrella companies?

Clearly, no contractor wants to be caught out by this handful of illegitimate umbrella companies, so many look for a list of HMRC approved companies. However, as we’ve already discussed, this doesn’t exist. The good news is however, that the vast majority of umbrella companies out there are HMRC compliant, even if they are not HMRC approved.

These HMRC compliant companies will take care of a contractor’s tax returns as well as offering other benefits that are part and parcel of an employer-employee relationship, such as holiday pay, sick pay and maternity or paternity leave.

It’s clear to see why using an umbrella company has become a popular route for thousands of contractors, especially since changes to IR35 rules are set to come into play.