Umbrella companies have been around for about ten years now. Prisma Recruitment have never been fans. In their simplest form they act as payroll agents for which they charge the worker and not the agency. Many have got involved with questionable tax avoidance arrangements mainly involving traveling expenses that they use to supplement worker's wages. All seem to issue incomprehensible pay slips.
Inevitably a sector which markets tax avoidance to normal workers was always going to attract the attention of the tax authorities.
In response the Chancellor announced as part of the Budget 2015 that the government introduced proposals to restrict tax relief for travel and subsistence for workers engaged through an employment intermediary, such as an umbrella company or a personal service company, where that worker is under the supervision, direction and control of a third party.
This will remove workers’ entitlement to claim tax relief for travel and subsistence from their home to place of work where:
- the worker is supplied by an intermediary to a third party (an intermediary will include umbrella companies and personal service companies). This will therefore include ‘limited company’ contractors.
- The worker is broadly subject to direction and control by that third party.
This means somebody who broadly looks like an employee will not be entitled to relief whereas someone who looks like a self-employed worker will continue to be entitled to relief. This approach aligns with that taken for 'agency workers' (as defined in the agency regulations) in the Finance Act 2014.
This follows earlier legislation which requires anyone paying workers employed in this way to disclose details of that worker and payments made to them on a quarterly basis.
We do not agree that people employed on contract should enjoy the same tax benefits as genuine businesses who take on real risk. However, we do think there should be some recognition that people working this way should have tax breaks not available to people in permanent jobs. The Government have turned the screw on all forms avoidance in this area but have not made any concessions. People working this way lack job security, access to credit and poorer prospects. For many it is not a choice.
We blame umbrella companies and before them composite companies, who, by barging into the sector with rash promise about paying less tax, have forced the authorities to stop turning a blind eye. As we have said many times the whole umbrella model is a con that either relies on dubious travel expense claims OR charging people to get paid.
While it is entirely possible that umbrella companies continue as nothing more than payroll providers, the absence of the expenses tax dodge which is offset against wages, it will make the fee they charge even harder to justify. This may mean we get to say goodbye to many umbrella companies. Time will tell.
Much more seriously, having also included private limited companies in the new proposals, the effect will be much greater and potentially more damaging.
HMRC have driven a horse and cart through the concept of the corporate legal person in recent years and even invented a new term, the Personal Service Company which they seem intent on diminishing to the point where everyone is PAYE in practice. The employment agency sector by forcing their PAYE workers into umbrella companies who charge the worker for their services are a disgrace to the recruitment industry. However, until the practice of charging workers to pay their wages is stopped it looks like umbrella companies will remain. It may be that they will no longer engage in tax avoidence - simply unjustified profiteering.