There’s no such thing as a free umbrella!
November 4, 2009 in Contractor News, Industry comment, Recruiter News
So not only can you now have a “full” umbrella service from £5 per week, but also it seems you can have a full service for £0! Yes, you heard it right, no cost to the Contractor. How can that be I hear you cry as you dash for Google and look to save some hard earned cash. Well… the bad news is that Parasol don’t do it and there’s us being all silly with transparency and honesty. No, we know you can’t deliver a true employment based umbrella solution for £0 per week, you can’t do it for £5 but I digress. It seems some providers are marketing free umbrella company services and of course on paper it looks like a great deal. I actually don’t have a major issue with businesses designing and delivering free models but I do have a problem with the economics of the truth.
Some of these new models put the Contractor in a single person limited company as the employee (a one person umbrella in effect) and using something called the VAT flat rate scheme – the provider keeps the difference between the VAT charged (at 15% or 17.5%) and VAT claimed (as low as 9% in some cases). Technically it works and yet I wonder if HMRC intended that VAT Flat Rate to be used in this way? I also wonder if the Contractor is told clearly that the provider uses this mechanism? Of course, should that Contractor run his own Limited Company then that difference would be returned to the Contractor and not a provider.
As I said, technically it works but an industry that does not have the best PR with the authorities, is it wise to be promoting such a solution and not be open about it? As a Contractor you might ask whether you really care as long as you get paid but in my humble view, we should care. If we continue to push the boundaries to the extreme then Government will simply continue to legislate and that will hit Contractors too.
There’s no such thing as a free lunch and there’s no such thing as a free umbrella.
Bel Grant said on November 4, 2009
My sentiments exactly, Rob. There are far too many payment schemes, now and in the past, based on the view that owner managed contractors are not running real businesses at all and, instead, are little more than a convenient payment vehicle. Because of this, more business savvy entrepreneurs encourage them to misuse the necessary advantages open to genuine business operations to stay profitable and competitive. The reason why IR35 was introduced in the first place and why owner managed contractors are still viewed as exploitable commodities in need of protection of the AWD (if they can’t demonstrate that they are genuinely self-employed). If these freebie brollie schemes proliferate, HMRC will be on their coat tails in a flash and the flat rate scheme will be doomed.
Gordon Webb said on November 17, 2009
Can I also add that this solution can actually work out to be more expensive for a contractor then a typical umbrella… but its free I hear you say, let me explain. I know of one provider that markets a one man umbrella model for £0 per week however that’s only if you have no expenses, as soon as you submit over £20 worth of expenses then they charge you 5% of the value of the expenses, that’s a fiver for every £100 of expenses submitted!
Rob Crossland said on November 18, 2009
Good point Gordon. My main issue with these solutions is a lack of transparency and honesty with the Contractor.
Marcus Glover said on February 1, 2010
Hi
I’ve read this thread with interest because I am the MD of an Umbrella Company and we are actually offering the full service free and we are not pulling any tricks at all.
Admittedly the service will not be free forever but we are offering the service free for new registrations for 6 months or so with a view to gaining enough market share to use the economy of scale and acheive very low rates moving forward. Anyone who is mid contract when we do decide to charge a fee will be given the rest of their contract free with no commitment to stay with us at the end. So I do understand the need to be very wary of free offers but sometimes it is genuine and offered in good faith. If we do a good job for our contractors, then they will stay with us I hope….
regards
Marcus
Rob Crossland said on February 1, 2010
Thanks for the comment Marcus. At least you have some transparency and are admitting that there are conditions to the offer. I accept the land grab strategy as being valid of course but remain unconvinced that it helps our industry in the longer run.
Rob
Roger said on March 30, 2010
I have been a contractor for over 15 years and always used my own limited company. I have met many contractors using these umbrella companies and never heard of one that seems to work better than my solution. These companies are in business to make money and their profits must come from somewhere, usually the contractor. Find yourself a good accountant and set up a ltd.
Rob Crossland said on March 31, 2010
Roger,
Not everyone actually wants a Limited Company (with some of the extra responsibilities or work) and form our own work we also know that having a company does not always fit when you consider some of the roles etc (ir35 implications). That said, we offer both options so will always give a prospective Contractor best advice on his or her needs.