Freelancers' Questions: Should I use an umbrella company instead?

Freelancer’s Question: I have been offered a freelance contract which will be ongoing. I live in the UK and the company is based in Denmark. They do not have a UK company, and I will only be working on behalf of this one company -- for the foreseeable.

Do I need to be careful about working for only one company in this way? There is no way that I can become a permanent employee because they do not have a UK-based company. Therefore, after a certain amount of time, I wonder if I’d need to be employed by them.

Ultimately, I keep wondering - should I use an umbrella company instead? Or will the company likely refuse that, or need to be involved somehow with the umbrella? Or is indefinitely supplying on a freelance basis not reason enough to ‘go’ brolly?

Expert’s Answer: Firstly, you are not alone! We are seeing this question come up more and more at the moment, as businesses from overseas are hesitant to set up a UK entity.

We believe that is to do with the ‘B-word’ (Brexit), but that’s for another article!.

Another reason you're in good company (is IR35 reform)

You are also not alone in asking whether the freelance route might not be suitable for you. Due to reforms to IR35 being introduced on the 6th of next month, many freelance working arrangements are prone to change.

Under the UK-wide reforms, known as the April 6th ‘off-payroll rules,’ because the end-user is overseas, the determination of your IR35 status will fall to you, not them.

Hallmarks of a PAYE situation

However, we’d emphasise that if you are likely to only have one end-user (as you state), and if you will be working for them indefinitely (as you also state), then you are likely to need to determinate yourself as being ‘inside IR35.’ And as such, will need to be paid via PAYE.

Similarly, from the wider situation you describe, you are in essence very much looking at what sounds like an employee-based role, in terms of what the Denmark company will require from you and therefore, my recommendation is that you should be engaged with them on a PAYE basis.

You are therefore correct, in so far as a simple solution for you would be to work via an umbrella company. The effect would be to place you as an employee in the UK with the umbrella taking care of all of your taxes.

Getting your contract rate right for you

Be aware -- the key thing for you is going to be ensuring that you can accurately calculate the ‘correct’ contract rate. By ‘correct’ I mean the contract rate that is going to give you the taxable salary that they would offer you as a permanent employee, if you were to be on their own internal payroll, directly.

Obviously, working via a third-party umbrella company, you will incur additional employment costs (than if you were their internal employee).

And these costs will have to be met from the invoice-value sent to the client.

How to work out what your umbrella pay rate should be

Of interest to you perhaps, we have worked with a few clients of late to calculate what this figure would need to look like in order to net for their umbrella worker the same ‘take-home pay’ as if the worker was employed directly with the client. To give you some idea how to go about this, the starting point is to look at the proposed annualised salary and then work back to add on the ‘Employment Costs.’ Broadly these are:

• Employer National Insurance,
• the Apprenticeship Levy,
• the Umbrella Company’s margin; and;
• the Employer’s Pension.
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An additional recommendation to make this work worthwhile for you, financially, is this -- you would also have to ensure that the Denmark company would pick up the bank transfer costs, so that these are not passed down the supply chain to you.

Final thoughts

Finally, the Denmark company should be able to build into a contract an ‘addendum,’ to cover any additional employee benefits that they may wish to offer you, such as bonuses. This would just need to be stipulated in their business-to-business contract with the umbrella company.

So in summary, yes, what you are asking for is perfectly possible!

We would simply advise that you speak with a reputable and established umbrella company to ensure that you agree the correct invoice rate, to make sure you are paid an annual salary equivalent to how much the Denmark company has offered to pay you, or pays its internal staff doing similar work to you. Good luck, or as your new colleagues over in Denmark would say, ‘held og lykke’!

The expert was Lucy Smith, managing director of Clarity Umbrella.