Exasperated with the amount of legwork involved in filing your tax returns and the number of hoops you have to jump through in order to prove to HMRC that you’ve met your obligations? You’re not alone. Hundreds of thousands of freelancers are turning towards umbrella companies as a time-saving and efficient solution to their annual taxation ordeal.

Of course, one of the foremost priorities when choosing an umbrella company to work with is ensuring it’s one which will actually fulfil the requirement of tax compliance. That’s why many firms have now begun advertising themselves as HMRC approved umbrella companies on their websites, in their marketing material and beyond. But what does that phrase actually mean?

What is a HMRC approved umbrella company?

Quite simply, a HMRC approved umbrella company does not exist. Since HMRC treats umbrella companies in exactly the same manner as they do every other kind of employer, and since HMRC has itself declared that it cannot tell freelancers whether the company they are using is legitimate or not, such sort of propaganda is exactly that – marketing razzmatazz designed to catch the eye and set the company apart from their competitors.

In reality, the only way in which an umbrella company can stand out from the crowd is through the services, pricing structure and other distinguishing features that they offer. When comparing and contrasting different potential candidates for the umbrella company with whom you wish to work, you should be on the lookout for such defining features as price, comprehensiveness of the package offered, user-friendliness of the site and customer service.

Of course, as mentioned above, perhaps the most important factor when making a decision is the integrity of the company itself. While no umbrella companies are HMRC approved, the majority of them are HMRC compliant – but unfortunately, many of them are not. This is a subtle but important distinction, as it could land you in hot water with the authorities if you are found to be using one which is not compliant.

How to tell if an umbrella company is not HMRC compliant

Aware of the rise in unscrupulous companies looking to make a quick buck off unsuspecting freelancers by operating outside of the legal parameters of its system, HMRC recently published a set of guidelines aimed at equipping with individuals with the knowledge needed to spot a bogus operation at 50 paces. These include:

Unrealistic promises about your take-home pay

Some umbrella companies may advertise the ability to make your contributions more tax efficient by reducing your liability. In some cases, they may promise 80%, 90% or even 95% of your overall wage is not subject to taxation. This is highly unlikely, since the most basic rate of Income Tax almost always leaves you with 80% of your income – and that’s before your NICs have been taken into account.

Only processing part of your salary through payroll

Illegitimate umbrella companies may process part of your salary through payroll and attribute the remaining part to you directly. This indicates that only a percentage of your pay has been made taxable, when in fact the full amount is always subject to HMRC taxation. Although they are the ones who have committed the error, you will be held responsible in the case of an investigation.

Paying via a loan, credit or investment payment

Another trick that is frequently employed by shady companies is to arrange a payment system whereby some or all of your money is denominated as a loan, credit or investment payment. In this scenario, the company may try to allege that due to the nature of the capital, it’s not subject to NICs – which is, as HMRC has itself clarified, tantamount to tax avoidance.

Funnelling your pay through a number of other companies first

If your money is passing through several different shell companies before it arrives in your bank account, it’s highly likely that the umbrella company is using offshore interests to avoid paying tax on the interest it has accrued while handling your funds. This is a sure-fire signal that the company is not to be trusted.

Why choose an umbrella company after all?

Since there are no businesses which have been explicitly approved by HMRC, it might seem like umbrella companies could be more trouble than their worth. However, that impression is a mistaken one. Just because some unprincipled organisations are abusing the trust of freelancers, that doesn’t mean that legitimate umbrella companies don’t have a lot to offer.

For starters, the vast majority of options on the market are compliant with HMRC, even if they’re not approved by the body. This means they can take away all the stress of filing your tax returns and making sure you’re up to date with your payments. They also offer all the statutory benefits that a normal employer does, such as holiday allowances, sick pay and maternity or paternity leave.

What’s more, they’re becoming an increasingly attractive option thanks to the upcoming amendments to the rules surrounding IR35 contracts. Until recently, freelancers could take advantage of generous tax breaks and other incentives by setting up their own limited company, but the expansion of IR35 to include public sector works in 2017 and private sector ones from April 2020 looks to have largely negated those plus points.

As such, self-employed people face all the same challenges in terms of a lack of security, no statutory rights and an onerous amount of paperwork, but with few of the same financial perks that they previously enjoyed. Therefore, enrolling in an umbrella company’s scheme can ameliorate both problems by removing the burden of IR35 altogether (since the freelancer will now technically be employed) and handling all of the pernickety details.

Finding the umbrella company thats right for you

While there are no HMRC approved umbrella companies to choose from, that doesn’t mean there aren’t a plethora of superb options out on the market. That’s where Umbrella Broker can help. We allow contractors to compare several trusted umbrella companies in an instant, to find the best deal for them.

Use our online umbrella comparison tool to find the right umbrella company for you.