Having been involved in some fairly heavyweight tussles with HMRC over the tax issues relating to Umbrella Companies (which are perfectly legal and compliant if operated properly under existing legislation) we are fascinated to follow the Chancellors machinations as he looks likely to change the legislation to address some perceived inequality of tax treatment.
What are Umbrella Companies?
An umbrella company is a company that acts as an employer to agency workers who work under an over-arching contract of employment with the umbrella company at a number of end-clients, usually through a recruitment employment agency in the United Kingdom. The overarching contract of employment is designed to link a series of separate temporary workplaces together into a single contract of employment with the umbrella company.
One benefit of being employed by an umbrella company under an overarching contract of employment is being able to counterbalance some of the income earned through claiming expenses such as travel and meals, due to the temporary nature of the workplaces that may not be available to other employees of the end client. Expenses can be paid free of tax and National Insurance in those circumstances subject to the validity of the overarching contract of employment and compliance with the temporary workplace rules, thereby offering an advantage to the worker and the end client.
It is this perfectly legal advantage that the Chancellor appears to be looking to remove. It has also been noticeable that HMRC are policing the current rules with some vigour, looking very closely at the terms of overarching contracts of employment and the temporary workplace rules for signs of failure to implement the arrangements correctly.
Budget 2015 – What may we see?
Chancellor George Osborne will deliver his second Budget speech of the year on 8th July. One of the areas we expect him to address is that umbrella company and agency payroll expenses will be targeted for anti-avoidance measures, and the Government has already suggested that it is going to press ahead with measures to attack the way that it perceives that employment intermediaries take advantage of the travel and subsistence expenses regime.
We expect that the Chancellor will change the rules to restrict travel and subsistence relief for workers employed by an employment intermediary, such as an umbrella company or a personal service company, but who operate under the supervision, direction and control of the end-user, to put them on a similar footing to workers employed by the end client, with the Government stating already that legislation will take effect from April 2016 following a consultation on the detail of the changes, and that they are looking to ”level the playing field between employment businesses that seek to lower their costs by using these arrangements and those that do not.”
It will be interesting to see how the Treasury proposes to draft the rules to capture only employment intermediaries and to ensure that there is no scope for alternative models to evolve.
A change in the rules in this way is likely to have a significant impact on the business models of staffing companies and the Umbrella Companies which have helped facilitate significant tax savings in the staffing supply chain.
Is the Post-election targeting of umbrella companies, fair or unfair?
In response the umbrella companies have stated that it is not appropriate that these temporary workers are treated the same as permanent employees who have the luxury of being able to plan where they live and work and generally have only a short distance to travel each day. By the very definition of being a temporary worker they are travelling to a temporary workplace and by doing so have to travel much further than normal employees.
To target contractors would affect at least 200,000 people working through umbrella companies, and in reality the reduction in tax relief is likely to seriously harm the contractors who deserve the benefit most and are not better off than other workers despite the reliefs they are given.
However, Trade unions are opposed to the use of the schemes and have organised a series of protests against them in recent months, with one Trade Union quoted as saying “The umbrella tax scam is a direct attack on workers’ pay and skills. Highly skilled workers are only being paid the minimum wage. Agencies and contractors are forcing the workers to pay the National Insurance contributions they should be paying. The government needs to take immediate action and end this scam.”
Is this the end of umbrella companies?
The bottom line is that in April all current umbrella workers will require a new payment solution, or they will seek a new employer. If HMRC has its way, direct employment in industries where umbrella is common will experience an increase in the cost of labour approaching 20% through increased National Insurance and paid absence. That will need to be absorbed in higher charges to end hirers, reduced agency margins and lower pay rates to workers currently paid through umbrella.
No one can deny that there are some non-compliant providers operating at the less trustworthy end of the market. However, it is important to make a distinction between those firms and professional, compliant employment providers that offer skilled contractors and freelancers genuine support. Representatives of umbrella companies have commented that “Following the consultation Government now has a better understanding of the vital role umbrella organisations play and that umbrellas do not exist purely to provide tax savings to workers. Umbrella providers now have the opportunity to prove that we have a legitimate place in the economy. It demonstrates ongoing compliance with HMRC rules is essential.
Contractors will particularly welcome the decision not to change the rules on expenses. If they operate through an umbrella company, choosing one with 100% HMRC compliance status, will give them confidence that their expenses arrangements will meet with the taxman’s approval.”
In our view, until certainty is provided by the Government, and HMRC adopts a consistent policy, it seems inevitable that the entire sector will continue to find it difficult to operate with the ongoing debate on tax avoidance damaging compliant providers by association. We look forward to a resolution to the current uncertainty.
Unsure of your Umbrella Company? – Educating end users
End-user clients who employ agency workers and umbrella company workers have been targeted by HMRC with questions regarding due diligence on their labour providers.
As we said above, there are some very good and compliant umbrella companies in the marketplace. We have however also seen some who are less compliant, and we would advocate that workers and end-user clients ask to see the following from the umbrella company: -
A valid overarching contract of employment.
Written confirmation that HMRC considers the overarching contract of employment to be a true contract of employment.
A copy of confirmation from HMRC that the umbrella company have a valid dispensation permitting the tax and National Insurance Contribution free payment of travel and subsistence expenses.
If your Umbrella Company cannot provide you with these documents, you should seriously consider the need to switch to a compliant operator.
Whether you are an umbrella company, an employment agency, and end-user client or an employee of an umbrella company, and have any questions or concerns, please feel free to contact Outhwaite Associates Ltd for advice either through or website http://outhwaite-associates.co.uk/contact/ or by email on firstname.lastname@example.org or by telephone on 07949 929663.