Taxman in new attack on umbrella companies

Contractors on employment contracts should be asking probing questions of their employer or payroll provider to precisely determine how much they are paid and what for, amid a fresh assault on umbrella company payment models.

Speaking last night, Bauer & Cottrell issued the advice in response to HMRC warning contractors, recruiters and end-clients that some umbrellas are unlawfully offering temporary workers PAYE and National Insurance ‘tax relief’ on every pay day.

According to HM Revenue & Customs, such “pay day by pay day” relief models, never before singled out by HMRC, fail to properly account for the correct income tax, or the correct employers’ and employees’ NI contributions.

Used by contractors who incur travel and subsistence expenses that are tax deductible, and where an overarching employment contract is in place, the model offers the workers a gross pay, hopefully in line with National Minimum Wage (NMW) requirements.

But rather than then subjecting the gross to income tax and NI, the employer/umbrella applies tax and NIC ‘relief’ to the amount of the worker’s expenses, “with the effect that only the balance” is then subjected to the two liabilities.

“This tax and National Insurance contributions 'relief' is applied each pay day,” HMRC added, condemning the practice. “The information obtained by HMRC thus far indicates that the model….does not comply with the Taxes or Social Security Acts and associated Regulations.”

Addressing umbrella companies, the Revenue said that they should consider whether their business model is compliant with tax and National Insurance legislation, and should seek advice if in doubt.

It said this advice could be sought by the umbrella approaching tax officials directly, or it could come from a “professional adviser” – a route which HMRC did not recommended to clients, agents or contractors if concerned that their umbrella provides such relief.

“HMRC is seeking to identify those businesses currently operating pay day by pay day relief models”, the tax authority said. “[Workers/businesses concerned about such models] can provide HMRC with details, in confidence”.

Reflecting on what he confirmed was a “new attack” on the umbrella company sector, Paul Spindler, technology partner at Kingston Smith, the chartered accountants, advised against accepting the taxman’s invitation.

“The first point of contact for an individual who is concerned about this, should not be HMRC,” he told CUK. “I would suggest that contractors preferably speak to a professional adviser if they have any concerns.”

He explained that, where an employee incurs travel expenses out of gross salary, the Revenue is effectively saying that the employee needs to wait until the end of the tax year to make the claim.

The relief cannot be brought forward, to pay day or any other day, by the employer, and the relief needs to be obtained by the worker, claiming the deduction on their annual self-assessment tax return.

However, for always paying at least the minimum wage and for ensuring that expenses are not offset against that amount, some of the largest umbrella companies claim to be unfazed by HMRC’s clampdown.

The Freelancer and Contractor Services Association, whose founding member companies include Giant and Parasol, explained: “'Our view is that if the umbrella provider ensures that its employees are paid at or above NMW after deduction of travel and expenses payments, then they should not be affected by further HMRC scrutiny.”

Still, a former tax inspector says the message HMRC hopes to send translates as “just because you are an umbrella company,” which may have a dispensation in place, “it does not mean that what you are doing is correct.”

Kate Cottrell, of Bauer & Cottrell added: “I think it [pay day relief] is being used [by some umbrella companies] as a way of appearing to comply with the National Minimum Wage rules while still offering tax relief on expenses for low paid workers. 

“But I do not think it works and this statement shows that neither does HMRC.  So contractors need to ask questions and make sure they understand exactly what they are being paid and what for. Agencies and end clients also need to be aware.”

Taking issue with the targeting of the clampdown, staffing captains say the Revenue’s clean up of tax relief on expenses could have “unwelcome connotations” for the temporary recruitment industry.

Pointing out that umbrella companies, employment businesses, temporary labour providers (and the temporary workers themselves) are all within HMRC’s crosshairs, the Association of Recruitment Consultancies reflected:

“Provided the HMRC announcement is simply highlighting a specific tax issue for temporary agency workers, we see no problem.

“However to the extent that it goes beyond this, perhaps as part of a move against allowing expenses for temporary workers, and we have noted that all employers of temporary workers are singled out, we would be concerned. The Income Tax (Earnings and Pensions) Act 2003 makes no distinction between types of employer and there should be a level playing field for all.”

Ben Grover, ARC policy advisor, even said any move by HMRC to treat employers of temporary workers differently, perhaps by tightening up on dispensations, could “force down the temps’ net pay” wherever they are employed and incur expenses.

Warning of the potential knock-on effects, he said a drive by umbrella company contractors to demand higher wages to compensate for the Revenue’s tougher stance could follow, with the result being that such temporary workers could becomes less attractive to engage.

Editor's Note: Related Reading -

Hundreds of recruiters banking temps' tax relief

CUK's Directory of umbrella companies 

CUK's Umbrella Company guide