Umbrellas wary about the end of dispensations
Claims by the government that removing umbrella companies’ dispensations from April 2016 will have little other than a simplifying effect appear to be in dispute by the industry.
Agents, service providers and contractors themselves have been named this week as potential losers of the move, contrary to what the official impact assessment of the removal states.
Released by the Treasury, the assessment says that banning dispensations will not have “any” significant economic effect and that, while other impacts were considered, there are “none”.
Not so for recruiters, suggests industry body All Umbrella Companies Are Equal, which says such agents will likely see their compliance burden increase from April 2016.
“Recruiters will no longer be able to rely on production of a dispensation by an umbrella company as evidence of compliance,” warned AUCAE founder member Lucy Smith.
“[Although] an umbrella company having a dispensation in place has never been a true indicator of compliance…HMRC can revoke a dispensation at any time if it is not being properly applied.”
Instead, contractors’ recruiters will need to focus on the overarching contract that the umbrella has, and the internal audits that take place to ensure that expenses are allowable.
She added: “This will be in addition to the checks that are required to ensure that the umbrella company complies with their obligations under the Agency Worker Regulations that all their employees’ earnings are subject to PAYE.”
The upshot is that recruiters’ compliance obligations, which AUCAE says require “more and more” due diligence, will be even more time-consuming once dispensations die.
The Freelancer & Contractor Services Association has similar concerns. It says getting rid of a list of expenses that were free from P11Ds is going to add to the paperwork mountain.
In particular, FCSA’s Julia Kermode warned this week of a “return to increased record-keeping and reporting requirements for service providers” as well as “some contractors.”
Indeed, the impact assessment says that umbrellas whose employees use salary-sacrifice – the arrangement which the ending of dispensations is designed to tackle – will pay more in NICs.
There will be extra cost for dispensation-holders from making changes to their payroll systems, registering with HM Revenue & Customs and investing time in understanding its guidance.
But the Treasury document adds that up to 200,000 employers will benefit because they will be allowed to reimburse their employees with expenses as they crop up without the need for a dispensation. This is the whole 'simplification' point of doing away with dispensations, which won't be operated or applied for from April 6th 2016.
The department says: “Payrolling benefits in kind [BiK] provides the opportunity to remove or reduce employers’ obligations to send returns to HMRC.
“It can also make the system of taxing BiKs easier for employees to understand and more efficient at collecting the right amount of tax in real time.”
Collecting the right amount of tax bothered the Personal Service Companies Committee, which said that clear evidence of abuse of dispensations warranted action to ensure dispensations were “managed correctly.”
HMRC has gone further by removing them outright (from April 6th 2016). But this reflects what seems to be an increase in their incorrect application – back in 2008 it said the “great majority” of employers “apply for and operate” dispensations correctly.
It also underlines HMRC’s irritation with some umbrellas that pay expenses to their contractors free of tax and NICs in a salary-sacrifice deal, which serves to lower the NICs liabilities of both parties.
Contractor Umbrella, a payroll firm for contractors, reflected: “The legislation will apply [from April 2016] where employees would have been eligible for tax relief if they had incurred and met the cost of the expenses or benefits themselves.
“However the exemption will not apply where expenses are paid as part of a salary-sacrifice arrangement.
“[So] we regard the end of dispensations as a good thing for contractors because...this legislation will effectively separate pay-day-by-pay-day scheme providers from bona fide umbrella companies, as the former assign a proportion of salary as ‘expenses’ regardless of whether a cost has been incurred, whereas the latter reimburses incurred costs which have been evidenced".
Law firm Osborne Clark agrees: “The government has decided that dispensations and salary sacrifice for umbrella expenses will be abolished in April 2016. There will be some ability to pay tax-free expenses, but life will be harder for operators of expenses schemes with NICs going up.”