Contractors rely on their umbrella companies to ensure that all their tax liabilities are calculated correctly and the right amounts of income tax and National Insurance Contributions are paid to HMRC on time.
And because contractors take guidance from umbrella companies about what expenses they can legitimately claim back and offset against their tax bill, it is essential that the service company is compliant.
But how can you check if your umbrella company is complaint? Here are five key checks to make sure umbrella companies are compliant:
1: Investigate the umbrella’s background
Make sure the umbrella company is UK based and has a good trading history. Buy a comprehensive credit report that highlights any bad debts. Look at contractor websites that review umbrella companies and check contractor forums that can indicate whether an umbrella is trading compliantly or not. Ask your fellow contractors who they’ve used and search for news reports on the web – the umbrella may have been subjected to repeated investigations by HMRC.
2: Check your contract of employment
As an umbrella company contractor, you will become an employee of the umbrella and should expect to receive everything that comes with being a full-time permanent employee. This includes a formal contract of employment that provides you with the terms and conditions of your employment, including a minimum of 336 hours per year paid at the legal minimum wage. If you are not issued with a formal employment contract, or only a set of terms and conditions or joining letter, then you should request it. If the umbrella fails to deliver, it is not a legitimate employer.
3: Ask for the expenses policy
You should carefully check your umbrella’s expenses policy. Examine what the policy states you can claim and compare it to allowable business expenses on HMRC’s website. If the policy says HMRC dispensations mean you do not have to retain receipts, then the umbrella is not operating compliantly. A dispensation merely means that the umbrella companies are not required to complete a P11D for each employee.
4: Speak to the human resources department
Umbrella companies with just a few hundred contractor employees are, compared to most other UK employers, large employers. They should have the professional resources needed to effectively employ large numbers of contractors. If the umbrella lacks a professional human resource department or does not outsource this function to HR experts, then there is a reasonable chance that it is not operating compliantly.
5: Are you paid the minimum wage and holiday pay?
It is a UK legal requirement to pay employees a minimum wage and holiday pay, as well as other statutory benefits, such as sick pay and maternity benefits. Umbrella companies that do not pay their contractor employees holiday pay, usually by holding back a percentage of the contractors earnings, and do not pay the legal minimum wage (not including expenses) for at least 336 hours in a year are operating outside the law.
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