Recruiter Myths & Facts
Below are some of the common misconceptions surrounding the contracting world. If you would like to discuss anything you read on this page, please do not hesitate to contact a member of our team on 01206 713680 or email us at info@contractorumbrella.com.
Umbrella Companies
I don’t need to worry about which Umbrella Company my contractors use
Contractors can legitimately use an EBT/offshore scheme to take home more money
A blanket Professional Indemnity policy will cover all my contractors
IR35
Our contracts are written to fall outside of IR35
Managed Service Company (MSC) Legislation
An Umbrella Company can be classed as an MSC
It won’t affect me if my contractor uses an MSC to receive payments
Myth: I don’t need to worry about which Umbrella Company my contractors use
Fact: This couldn’t be further from the truth! Using a bad Umbrella Company can cause your contractors all kinds of troubles; such as non-compliancy, poor service, percentage charges, the list goes on. If the contractor receives a poor service, it is more than likely that they will cause you problems too. What’s more if you’ve recommended them, it will reflect poorly on your company!
Myth: Contractors can legitimately use an EBT/offshore scheme to take home more money
Fact: Both EBT and offshore arrangements are deemed to be tax avoidance schemes by HMR&C and many are currently under investigation. BN66 is a prime example where contractors previously using offshore scheme are now receiving tax demands for anything up to £100,000.
Myth: A 'special dispensation' with the Inland Revenue means one Umbrella Company can allow contractors to claim more expenses than another.
Fact: A dispensation is purely to save the Umbrella Company extra admin – all large Umbrella Companies have a dispensation! Without this, the company would need to see receipts for every single expense claim that they processed.
The dispensation gives maximum amounts for the most commonly claimed expenses, for which the Umbrella Company won’t need to see receipts.
For example, if the dispensation amount for hotel accommodation is £95.00, the company won’t need to see receipts from anyone spending £95.00 or less. This doesn’t mean contractors should automatically claim £95.00 – if they spend £50, they can only claim £50!
Myth: A blanket Professional Indemnity policy will cover all my contractors
Fact: Whilst an Umbrella Company providing blanket cover sounds like a great deal, only the most common, low risk, IT roles are covered. We have spoken to several major Professional Indemnity Insurance brokers, who have confirmed that there are no insurers or underwriters who would leave themselves open by offering a blanket policy which covers every single contract role on offer.
If a role isn’t covered by the blanket policy, it leaves the contractor wide open to a costly claim. To add insult to injury, they would need to take out a separate policy, whilst also paying for a service that charges you for blanket cover!
If you are considering using an Umbrella Company with such an offering, we would strongly recommend asking for confirmation, in writing from the underwriter, that the job roles on your books are covered by their policy.
Most contracts that require PI insurance as a condition of the contract, will also expect cover for a certain period after the contract has ended. A blanket policy lapses after the contractor leaves their Umbrella Company and therefore leaves them unprotected. To prevent a breach of contract, the contractor would need to take out costly retrospective cover that dates back to the beginning of the contract.
Myth: Our contracts are written to fall outside of IR35
Fact: This is in fact true, but if the contract doesn't reflect the contractor’s actual working practices, it would be of no use in the event of an IR35 investigation. If, for example, the contract states that the contractor can provide a substitute worker, but in reality they can't or a substitute would have to be vetted by yourselves or your client, they could find themselves in a lot of trouble.
If a contractor pays themselves a combination of minimum wage and dividends, and HMRC deem them to fall inside IR35, they would be liable to pay back all unpaid tax, a penalty and, in the worst case scenario, prosecuted for tax evasion. The Dragonfly vs. HMRC case is a prime example of this, whereby the contractor has been left with a massive tax bill of £99,000.
Myth: An Umbrella Company can be classed as an MSC
Fact: A managed service company makes payment through a combination of both PAYE and dividends; an umbrella company will only make payment through PAYE.
Myth: It won’t affect me if my contractor uses an MSC to receive payments
The Government will being enforcing the new rules with additional legislation which will allow the transfer of debts for income tax and national insurance contributions to “appropriate third parties who have been involved directly or indirectly in, and who have materially benefited from, the MSC's provision of services”.
This potentially could leave you owing a very large sum of money on behalf of your contractor! To avoid this, you should ensure your contractors are either using a PAYE Umbrella Company or a legitimate self-administered Limited Company.
Return to Agencies/Recruiters home.
