Osborne targets umbrella companies 'from all angles'

Umbrella company workers were the only contractors to be targeted in today’s Autumn Statement, but like their limited company counterparts they face no immediate clampdown.

The relative let-off for PSC contractors, who are almost always in the chancellor’s crosshairs, is thanks to the publication of the long-delayed IR35 Review now being imminent.

So says Jason Piper, technical manager of tax and business law at the Association of Certified Chartered Accountants, who is also a member of the IR35 forum, the review’s co-author.

He told ContractorUK: “It’s true that the Autumn Statement could have shifted the contractor tax landscape, but it seems that George Osborne did not wish to distract from the IR35 Review

“[The publication of the review] is expected shortly. Contractors operating via Personal Service Companies will have to wait until then for any real attention on how they operate.”

As to those contractors who operate through an umbrella company, Mr Osborne singled out their ‘modus operandi’ in his speech, as an addition to a £2.8bn crackdown on tax avoidance.

In fact, immediately after outlining the raft of new anti-avoidance measures, the chancellor said: “We are also consulting on other measures including the use of so called ‘umbrella companies’ to deprive people of basic employment rights like the minimum wage and avoid tax.”

Chapter 2.417 of the Autumn Statement elaborates, albeit only slightly, as it says a “review” will be held on the "increasing use" of overarching contracts of employment by umbrellas.

It adds: “These arrangements enable workers to obtain tax relief for home to work travel that would not ordinarily be available. The government will publish a discussion paper shortly to inform possible action at Budget 2015.”

More immediately, the government will stop tax relief from being claimed on reimbursed business expenses when they are paid in conjunction with a salary-sacrifice scheme.

All Umbrella Companies Are Equal, an industry group reflected: “[The chancellor today] announced a consultation on unscrupulous umbrella companies who are not affording their employees Employment Rights and are operating salary sacrifice schemes which are reducing HMRC’s tax take.

“This follows pressure from the union UCATT who has been campaigning against umbrella companies following the introduction, by HMRC, of the Onshore Intermediaries Legislation which addresses the issue of false self-employment."

According to the group’s Lisa Keeble, who is the managing director of ContractorUmbrella, both the moves by the chancellor “come as no surprise” and should be cautiously welcomed.

She told CUK: “It will be a case of ‘watch this space’ to see what develops from the consultation but the hope is that the result will reflect the desires of the industry and, finally, create a level playing field.”

A similar endorsement of the chancellor’s actions was sounded by Parasol, which said they might represent the “landmark moment” the industry has been asking ministers for, so policy can distinguish between the rogue payroll operators and the reputable ones.

But two accountants who specialise in contractors and the IT sector were more guarded. “As ever with political announcements, very little detail was given,” said Paul Spindler, technology partner at Kingston Smith LLP, pointing to the umbrella consultation.

“A perhaps worrying comment was the lumping of umbrella companies into measures aimed at reducing tax avoidance. What this actually means we will have to wait for the detail on.”

The Low Tax Group, which focuses on contractor taxation, suspects that it knows what it means. “This is another attempt by HMRC to penalise hard-working contractors,” warned the group’s Martin McKechnie.

“It is noteworthy that umbrella companies are being signalled out, especially given the recent success HMRC have had with Reed.

“But, given that most contractors are working under flexible arrangements and often located at multiple sites within a twelve month period, this seems a punitive idea to attack travel expenses for contractors.”

He added: “Contractors are more willing to commute further due to the short term nature of the work and this could detrimentally affect the labour market if their travel would no longer be an allowable expense.

“Permanent employees can buy annual season tickets and reduce their costs, but contractors often do not have that ability as their contracts are of a shorter period. The current rules in place are effective and I feel any legislation to remove travel from expenses would be draconian and unfair.”

Worse still, it could even be fatal for some umbrella companies, which are now in a period of uncertainty, according to Kate Cottrell, of employment status firm Bauer & Cottrell.

The former tax inspector told ContractorUK: “It looks like the writing is on the wall for umbrella companies as the scrutiny is coming from all angles -- salary sacrifice schemes, travel expenses and overarching contracts of employment.”

She added: “I note that the government will be issuing a ‘discussion document’ shortly and it is a pity that we do not have a timeframe for this. If the government decides to take action in Budget 2015, there is very little time for the umbrella company industry to consider its position.”

Editor's Note: Related Reading -

Government's dislike of umbrella companies unfolds

Umbrellas urged to set Osborne straight

Government proposal to claw back millions by banning tax relief on travel expenses

HMRC's expenses review: The good, the bad and the ugly

Autumn Statement 2014 - a guide for contractors

What Autumn Statement 2014 means for your money

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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