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Umbrella firms suspected of having abused the basis on which their dispensation was applied for or has been operated in the past face having it withdrawn with immediate effect. Announcing the policy yesterday, HMRC said that until now dispensations, a list of certain employee expenses, were revoked retrospectively only in “exceptional circumstances.” But tax officials say these “restrictive” powers have led to a small number of companies taking advantage, such as by changing the way they make expenses available to their staff. “We will now consider revoking a dispensation retrospectively where there is any evidence of misrepresentation or negligence by an employer, or other person paying expenses or providing benefits in kind,” the Revenue said. Dispensations are umbrellas’ lifeblood because they let them forego declaring the expenses within to HMRC, and save their employees from inputting these expenses into self-assessment. The notice would typically come to an end if the qualifying conditions were no longer good enough to HMRC, or it would be revoked by them if its owner had operated incorrectly. Retrospective revocation still applies in these circumstances, and a raft of new ones: if the dispensation should not have been granted in the first place, perhaps arising by an applicant not providing all the relevant information, then it may be retrospectively revoked. A change in the qualifying conditions which was not notified to HMRC would also result in retrospective revocation of the dispensation, the tax authority said. It added: “Legal advice has suggested that our current practice is unnecessarily restrictive and as a result we are changing our practice in relation to retrospective revocation of a dispensation. “This will not affect the great majority of employers who apply for and operate dispensations correctly.” Bob Jones, an ex-tax inspector, was unsympathetic to the sudden targeting of umbrella companies and other employers using dispensations. “Frankly if an employer has acted negligently in any manner they ought to expect that the dispensation is withdrawn retrospectively. “However, I think that the main concern of HMRC is not the dispensation itself but the nature of the contract between umbrella and contractor. “We hear quite a lot about overarching contracts and HMRC may feel that many brolly contracts do not meet the criteria to qualify for overarching status and as such the dispensation should never have been granted in the first place.” If an umbrella has not been robust enough at any time in the past with its audit trail in the eyes of HMRC, then they will soon hear from its officials. “If negligence is involved then expect an investigation into earlier years with interest and penalties,” Mr Jones said. “If negligence is not involved, then the dispensation will be withdrawn without retrospection [and]... include the expense payments with pay and then tax the gross amount accordingly.” That gross amount could total up extremely nicely for the Revenue: although it is a relatively small market in the IT contracting industry, a single mid-sized umbrella could end up owing “millions.” Also in his analysis , Roger Sinclair, of legal consultancy Egos Ltd, said the move is “a declaration of war by HMRC on umbrella companies who they believe are abusing their dispensations.” “ [For] an umbrella company, the one thing worse than a dispensation being withdrawn would be for that dispensation to be withdrawn retrospectively. “Why? Because the umbrella can then expect to be hit with a demand for all the tax and NI that it would have had to deduct from all the expense payments that it made in the past without deducting tax, before the dispensation was retrospectively withdrawn.” Mr Sinclair said that for the most substantial umbrella, a retrospective revoking of their dispensation, and the associated tax demand, would "almost certainly result in insolvency." "I actually think this is of potentially greater concern than the MSC legislation," he added, "which may be serious but which individuals have a reasonable chance of steering clear of. I suspect there are many umbrellas whose heads remain in the sand." Feb 14, 2008 Email this article Printer friendly page Previous Page
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