Does IR35 apply to umbrella company employees?

ir35 off payroll umbrella IR35 has had a profound impact on the contracting world over the past almost 25 years. How do these tax rules affect umbrella company employees?

IR35 and Off Payroll – the basics

The IR35 rules target individuals who provide professional services to clients through an intermediary (usually a limited company).

The legislation – which became law in 2000 – determines whether an individual would be considered an employee if the intermediary (the limited company) did not exist.

If the individual is found to be a disguised employee, they will be subject to standard employment taxes on their contract income.

In 2017, new Off Payroll working rules were implemented for public sector contractors due to apparent non-compliance with the original IR35 rules.

These rules were extended to private sector businesses in April 2021. The new rules place the burden of determining a worker’s IR35 status on end-clients.

If you work for a small business, you can still self-certify your IR35 status, as all contractors could before 2017. However, if you work for any other business or organisation, your client must determine your IR35 status.

IR35 and Umbrella Companies – do the rules apply?

So, what happens if you are contracting via an umbrella company rather than your own limited company?

In short, IR35 does not apply if you work via an umbrella company.

As an umbrella company employee, all of your income is already taxed as employment income.

You don’t need to concern yourself with IR35 at all.

Some common umbrella company IR35-related questions

Do I have to use an umbrella if I’m caught by IR35?

Not necessarily. Although there is no tax advantage to using a limited company if your contract is caught by IR35, you may prefer to keep your company running, as future contracts may fall outside of the rules.

Some accountants also have umbrella companies within the same organisation, so you can use a flexible contract to easily switch between trading structures according to the IR35 status of your current contract.

Can a client force me to use an umbrella company?

Since the April 2021 Off Payroll rollout to the private sector, many risk-averse clients have blanket banned limited company workers. If they incorrectly determine your IR35 status, they are responsible for any unpaid taxes.

As a result, many large clients will only hire you if you’re working through an umbrella company.

They can’t force you to do anything. You can either accept the contract (as an umbrella employee) or look for another contract.

This is the reality of the market at the moment. Industry experts are optimistic that a double taxation anomaly of the off payroll rules will shortly be tightened up, making clients less likely to impose blanket bans.

Can a recruiter force me to use a particular umbrella company?

Most large recruitment agencies have preferred supplier lists (PSLs). A PSL contains a select number of umbrella companies and accountants. Recruiters often receive either money or ‘benefits’ for referring new contractor clients.

So, an umbrella being featured on a PSL may not be an indication of quality.

Again, recruitment agents can’t force you to use a particular umbrella. However, in this difficult market, you might find it easier to use an umbrella ‘recommended’ by a recruiter than fight to use a non-PSL firm of your choice.

What is an ‘IR35 compliant’ umbrella?

We often see umbrellas using this term in their marketing. It is misleading in that all PAYE umbrella companies are IR35 compliant because IR35 doesn’t apply anyway.

There’s nothing extra any umbrella company can do towards being ‘IR35 compliant’.

Are umbrella companies responsible for determining IR35 status?

As discussed above, umbrella companies are not responsible for determining IR35 status. The IR35 rules apply to contracts facilitated through personal service companies (PSCs). As umbrella company workers are taxed as employees, the question of IR35 status does not arise in this context.

Make sure you only use a reputable umbrella

Believe it or not, the umbrella market is unregulated.

This means that a few unscrupulous players coexist in the marketplace with established, solid umbrellas.

Only ever use a UK-based PAYE umbrella company. Look for umbrellas that have been audited by the FCSA or Professional Passport.

Read these guides to help you choose the best umbrella (assuming you have a choice!)