How the umbrella hunt will hit contracting

An attempt by HM Revenue and Customs to clean up umbrella providers' offerings was widely expected to come in the Budget, but HMRC has been more subtle and added an announcement into their Employers Bulletin.

The announcement that HMRC can now revoke dispensations retrospectively sends a clear message to all umbrella providers that they need to clean up their act or face some extremely severe penalties.

The policy change also sends out a message to some contractors who for sometime, have been openly admitting on forums that they abuse expense policies and make claims that they are not entitled to.

In these cases, contractors could find all their expenses disallowed and potentially that they themselves face hefty tax demands.

HMRC has made their intentions clear; they are not prepared to allow the abuse of expense dispensations by any provider or contractor.

One of the issues the tax authority faced in the past when trying to address non-compliance of providers has been that as soon as they take action the company folds, leaving HMRC unable to recover any outstanding sums.

This has been a major concern for HMRC for sometime, particularly as the vast majority of umbrella providers do not have any level of significant assets.

Some in the industry will see this shot across the bows as a precursor for the umbrella providers own form of debt transfer rules under the MSC legislation.

I do not believe this will be the case for a number of reasons.

Firstly, the debt transfer rules implemented last year have had far wider-reaching implications than HMRC anticipated and have created a different set of problems and challenges as a result.

Debt transfer applying to the umbrella market will create a further period of instability and uncertainty and at this time this could prove damaging.

Secondly, HMRC has existing powers it can invoke if it can prove negligence, that effectively apply the same consequences of debt transfer to directors and
officers of the umbrella providers.

We believe that HMRC will continue on the path it has trodden for a number of months.

And contrary to common belief, HMRC is not out to close every provider or fine every contractor. Where it sees a genuine desire to comply, it has shown a willingness to work with that business to address issues and ensure that
compliance going forward is strong and robust.

However, where HMRC feels that a provider has little or no right attitude towards compliance, we believe they will take swift and decisive action.

We would not be surprised if some providers in the very near future, start to have dispensations withdrawn and under the recent announcement, this is now possible retrospectively.

One of the issues faced by an umbrella provider, where the dispensations are removed retrospectively, is that in most cases this would result in the provider becoming immediately insolvent.

So the question is, how will these changes translate in the market?

From a contractor's perspective there are going to be two main changes.

There is likely to be a reduction in expenses they are able to claim. For example, we expect it will now become common practice for umbrellas to only allow travel and subsistence claims from the second assignment onwards.

Secondly, contractors are likely to be required to provide more receipts or firm evidence that expenses have been incurred. Non-receipted expenses policies have always been difficult to manage and have often encouraged exaggerated expense claims. Providers cannot afford to run this risk in the future.

Contractors, meanwhile, need to become extremely cautious of any company offering expense claims that appear generous.

Contractors also need to ensure their expense claims are real and legitimate. If HMRC find at a later date that this was not the case then the contractor not only faces the potential additional tax liability but can face penalties of up to 100% of the amount owed and interest.

Where HMRC identifies a provider as 'non compliant', previous and existing contractor employees are likely to face enquiries and be asked to demonstrate past expenses.

Where these cannot be demonstrated additional demands will be raised.

From a recruitment agency perspective, contractors may notice one major change: agencies will need to ensure that any umbrella provider they recommend, whether officially or informally, is entirely compliant.

All agencies need to ensure robust due diligence processes to assess providers compliance or they could face action from contractors if that provider is later found to be non-compliant.

The changes that providers face as a result, depend solely on 'how close to the wind they were sailing' in the past.

Common best practice and procedures are likely to be adopted and the difference between providers will become more customer service, compliance and support driven, as opposed to net retention rates which it is currently primarily based on.

Crawford Temple is a director of Professional Passport , a compliance organisation .


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