Government's dislike of umbrella companies unfolds

Umbrella companies and the contractors on their books were last night having to reorient themselves, after George Osborne’s Autumn Statement targeted them “from all angles.”

Salary-sacrifice schemes, travel expenses and overarching contracts were all moved on by the chancellor, as was a ‘loophole’ in the quarterly return rules for employment intermediaries.

But the Treasury’s reasoning to consult on an established area of the temporary employment market seems to differ from Mr Osborne’s, according to accounting software firm FreeAgent.

Its chief accountant Emily Coltman said: “In his speech, the chancellor said that this [consulting on umbrellas] was to ensure workers were not deprived of employment rights.

“But in the detailed [Treasury] document on the Autumn Statement (AS), the reason given was to restrict the claiming of tax relief on home-to-work travel.”

Indeed, in its full report the department says umbrellas’ overarching contracts let temps benefit from tax relief on the cost of such travel, even though “other workers” have to pay it.

In his speech however, Mr Osborne said a consultation would be run on the use of “umbrella companies to deprive people of basic employment rights like the minimum wage”.

Discrepancy or not (the chancellor went onto say such use avoids tax), umbrella company Paraplus rejects the characterisation that MPs and people tuning into his speech heard.

“This sweeping statement does a disservice to those umbrellas who exist solely to provide a fair and ethical platform for the contingent workforce,” regretted Paraplus’ Phil McDonald.

“We look forward to the outcome and hope it provides a clear and consistent framework [because] if contractors can understand [it], then rogue operators will one day cease to exist.”

The Freelancer and Contractor Services Association agreed. It sees the consultation as a way to ‘dispel some myths, improve standards and stamp out rogues who’ve tarnished the sector.’

Julia Kermode, FCSA’s chief executive said: “It is not the umbrella ‘way of working’ that it is wrong, it is the non-compliance of some umbrella employers that is wrong.

“We are committed to ridding the [umbrella] industry of malpractice once and for all -- allowing unethical behaviour to persist is unfair to contractors, recruiters and their clients”.

The subtext is that “any umbrella that fails to offer genuine employment rights or pay the minimum wage” deserves to be spotlighted and ejected, as Parasol, another brolly, puts it.

But its chief executive Rob Crossland admits that, while he welcomes the consultation, he is “slightly concerned by the premise of Mr Osborne’s statement” to the House of Commons.

That’s because in his speech the chancellor “seemed to imply” that “all” umbrellas – rather than just a minority -- deprive their users of basic employment rights, Mr Crossland said.

It’s an implication that umbrellas’ advisers believe their clients are correct to be concerned about, partly because of what it suggests about the government’s understanding of them.

“The government’s statement that some temporary workers benefit from tax relief for home-to-work travel expenses that is not generally available to other workers is, as we see it, fundamentally flawed,” said law firm Egos.

“The umbrella industry appeals to workers precisely because it allows workers who work at temporary workplaces to get the same benefit in terms of tax relief for home-to-work travel expenses as is available to other workers - but would not otherwise be available to temporary workers.”  

Read with AS chapter 2.141, which reaffirms a consultation on a new framework for travel and subsistence tax relief, the wording suggests to the firm that umbrellas’ rules will change.

“But probably not for a year or two,” reassured Egos’ legal consultant Roger Sinclair. “It will be interesting to see what the [Treasury’s promised] 'discussion document’ states.

“And in particular, the extent to which it genuinely allows for open discussion, or simply presents (as so often seems to happen) a pre-determined objective of extracting more tax.”

The AS at 2.51 exists because of that objective. It says that tax relief being claimed on reimbursed expenses when they are paid in conjunction with salary-sacrifice is to be stopped.

 Contractor accountancy firm DNS Associates reflected: “Umbrellas are going to be hit badly, as they cannot now pay expenses in conjunction with any salary-sacrifice arrangement.

“The case of Reed does highlight this practice as being quite prevalent, despite the fact that the majority of umbrella companies act fairly and don’t set up for tax avoidance purposes.”

The firm’s Sumit Agarwal also feels that the penalty regime in the quarterly return rules on employment intermediaries being tightened is ominous. But Mr Sinclair, a lawyer, believes that the government appears to be just plugging a loophole.  

Either way, the coalition seems irked. “Umbrella companies are unpopular with the government because they use the underlying travel expenses rules in a way that was never intended,” said Anthony Thomas, of the Low Incomes Tax Reform Group.

Although glad about the consultation, he fears that unless any new measures are “very carefully” thought of from the view of low-income workers, such workers could be worse off.

LITRG added: “We do not recommend that umbrella companies should be swept away – instead we urge the authorities to take a holistic look at what is driving workers to use these schemes in the first place. 

“This perhaps gives an inkling as to how complicated the situation really is and for this reason we would urge caution – a view we will put forward in any consultation on the matter.”

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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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