UMBRELLA COMPANY

In the United Kingdom, an 'umbrella company' acts as employer to independent contractors who work under temporary contract, usually through a specialist employment agency. Recruitment agencies will only issue contracts to a Limited Company; since the introduction of the MSC (Managed Service Company) legislation in the budget 2007 the only way a contractor can comply with this requirement is to set up their own personal limited company or to use an umbrella company. An umbrella company issues invoices to the Recruitment Agency (or client) and, when payment of said invoice is made, will typically pay the contractor through PAYE (although historically the term has also been used for salary and dividend type payment structures).
Umbrella companies have become more prevalent since the British government introduced so-called "IR35" legislation that makes it less beneficial to start your own company and relatively more attractive to join an umbrella company.
In December 2006 the UK Treasury introduced the above mentioned draft legislation "Tackling Managed Service Legislation" which seeks to address the use of "composite" structures to avoid Income Tax and National Insurance on forms of trading that the Treasury deem as beeing akin to "employed". After a period of consultation and re-draft, the new legislation will became law April 2007 with additional aspects coming into force in August and fully January 2008. 'PAYE' Umbrella companies are effectively exempted from the legislation, which also seeks to pass the possible burden of unpaid debt (should a provider "collapse" a structure) to interested parties e.g. A recruitment agency that has been deemed to encourage or facilitate the scheme.
Whilst many of the Umbrella Companies advertise similar offerings, much of the detail should be checked by the user. Often Expenses are used as a selling point with potential abuse of "dispensation" (HMRC issue documentation to employers as a more effective way to record Expenses rather than as a method of generating more income) agreements. It is the independent contractor that will be liable should HMRC decide for instance that expenses have been incorrectly claimed.

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References

References

★ http://www.hmrc.gov.uk/ir35/help.htm

★ http://www.hmrc.gov.uk/employment-status/details.htm

★ http://www.hmrc.gov.uk/employment-status/msc-guidance-july07.pdf

★ http://www.hmrc.gov.uk/employers/ebik/ebik1/dispensation.htm