The Gabem Umbrella Companies Blog:
Home of Umbrella Company Gossip Online

People discover the umbrella company industry all the time and as with any exploration there are false leads and red herrings to cause problems along the way.

These myths have proven difficult to clear up because despite the best effort of the more informed people in the umbrella company industry the less reputable elements continue to promote them.

I'm not a fan of deception or misinformation to customers, true it might bring them to your door, but they are the ones who stand to lose the most, and it damages the industry as a whole. I much rather people are informed and know exactly where they stand, it saves time and trouble later on; I am in the happy situation that my employers agree with me.

So here we go, here are the myths that just won't quit.

1. Umbrella companies can be HMRC approved. No. They. Can't.....Well that was easy, next.....Okay maybe I should expand on that a little. There is no official standard within the umbrella company industry (something several companies have actually called for) so there isn't a test you can pass, there isn't an approval list, there are just regular audits. If you pass the audit great, if you fail, well it can either be some minor things they would like changed or something major that could cost you millions.

As a final argument against "HMRC approved umbrella companies", what do you think would happen to all the unapproved umbrella companies?

2. Dispensations mean you don't have to send in receipts. Dispensations are between HMRC and the umbrella company in question. They are there to streamline the process of Year End, allowing the umbrella company to reduce what they declare on a P11D to The Revenue in the name of each employee. Even with a dispensation contractors working through the umbrella company still have to prove that they incurred expenses and have to provide receipts.

If your umbrella company doesn't request receipts and and for some reason HMRC were to query an expense re-imbursement, you would be required to produce the receipt or face the possibility of a bill for back taxes (and probably further inspection).

3. I can claim the full amount listed on my umbrella companies dispensation even if I haven't spent as much as that. Definitely not. HMRC says that expenses have to be "incurred wholly and exclusively in the performance of the duties of the employment." it's actually the very first word in that statement that tells you everything you need to know. Expenses have to be incurred, if you haven't incurred them and you claim for them that could be seen as fraud.

Several umbrella companies used to state that you could claim the maximum amount of their dispensation each week. It was part of their marketing literature, until someone pointed out what they were actually telling people to do.

4. Some umbrella companies can get me more money than other umbrella companies. Only by reducing how much they cost you or allowing you to claim expenses you haven't incurred or can't prove. All umbrella companies should work the same way, pay you minimum wage at PAYE and use expenses to increase your take home by reducing your tax liability. If this is not how your company is operating, it's probably not an umbrella company, and could be an "umbrella company alternative", a distinctly riskier enterprise.

5. I will be self employed through an umbrella company. This one is probably down to poor initial explanations. When you work through an umbrella company, you are an employee of that umbrella company (even if the umbrella company you are working for doesn't mention the word anywhere in their documentation). You are entitled to all the statutory benefits that go with that, which leads nicely on to.....

6. I am not entitled to Statutory Maternity Pay (SMP) through an umbrella company. When you work through an umbrella company you're an employee plain and simple. As an employee, you are entitled to Statutory Sick Pay, Statutory Maternity Pay, Statutory Paternity Pay, and all the other benefits associated with employment. If you're working for an umbrella company and are not an employee or entitled to SSP you need to speak to your company as there is a potentially serious problem.

7. If I claim expenses through an umbrella company I will get a full amount back. This is actually quite complex, but it comes down to this: If you were to spend £100 on accomodation and put it in as an expense claim your take home pay would probably be around £40 more than if you hadn't claimed expenses. The £40 represents the tax you would have paid on that £100 had you been paid without claiming.

8. If I want to be paid the same day I need to pay for a CHAPS payment. Paying for CHAPS is something of a gripe I have with the umbrella company industry. There should be no need to pay for a CHAPS payment, it should be a standard part of the service. Now you might think that CHAPS payments are expensive, £20-£30 maybe? Well like anything you buy in bulk you can get a discount, and in the case of CHAPs it is significant, probably in the realms of a 75% discount.

Even if you were to walk into a bank and ask them to make one for you it would only cost around £20.

There is a second part to this answer, why use CHAPS at all? The Faster Payment system was introduced last year, it has same day payments, it costs significantly less and is easily processed. There is no reason to use CHAPS now, let alone pay for it.

9.An umbrella company that costs £15 net is better value than one that costs £22 gross. Okay value is difficult to quantify because it depends on the individual, but if we go on XCOSTX alone if you convert the £22 gross to a net figure on a normal rate of tax it comes out as £15.18. The net figure will fluctuate based on your tax code, so any predictions made on a site are likely to be displayed to put the company in the best light possible, regardless of if it will apply to you. One of the things to look out for are the words "fees start from" and "from as little as"

10. I can take home 85% of my gross income by working through an umbrella company. This is probably the easiest of the 10 to answer: No you can't, any company that tells you it can get you 85% of your gross income is either being deliberately deceptive or not an umbrella company, either way you need to do some research. Remember if it seems too good to be true it probably is.

Have a good long weekend folks!

Hugo
@GabemUmbrella
30/04/2010