The end of Umbrella Companies

HMRC has today published draft legislation to be enacted in April 2016 to close the loophole used by umbrella companies and others to pay agency workers for travel to and from work. 


These new rules will contain a transfer of obligations for un-collectable tax onto the individual directors of intermediary companies and potentially the end user client as well. The government have been unsympathetic to the argument that temporary workers suffer a raw deal already and the removing of this benefit makes it worse.

Given the abundance of lengthy supply chains, the transfer of liabilities element could well see the many RPO companies, tier one service providers and their like running scared and insisting all contractors are run as PAYE by the supplying agency. This is especially so, as the legislation will presume all workers are under supervision, direction or control, unless it can be shown otherwise. Equally, there may be an exodus to the limited company model. But expect similar legislation in this area too.

The blame for this almost inevitable reaction by HMRC lies firmly at those responsible for commercialising tax avoidance for temporary workers in the first place. Even more blameworthy, are the many recruitment agencies that strong-armed their whole workforce into the umbrella model (often receiving a cut of the proceeds along the way) and thus drew the inevitable attention of the tax man. So much for the recruitment sector raising standards.

The big losers are of course the many temporary workers who will no doubt be told that as part of their wages were made up of tax relief on travel which they cannot now claim, their net wages will now be less.

It remains to be seen how many of those workers will continue to work for umbrella companies who from next April, will do nothing more than charge workers to be paid their wages.