Taxman is coming, umbrellas told

A 'let off' and a 'Great Escape' is how the Pre-Budget Report has been hailed for umbrella company contractors who get tax relief prohibited to other staff.

But industry experts last night warned that the Revenue is setting up a taskforce to ensure umbrella companies are not flouting their expenses rules or dispensations.

Dispensations are the lifeblood of umbrellas because they let them forego declaring the expenses within to HMRC, and save their employees from inputting such claims.

Problematically for a government hungry for cash, providers have been using tax-free expenses payments in lieu of salary, whether or not those expenses were incurred.

Little wonder, then, that providers are now expected to be first in line for any tax demands, if HMRC proves their expenses or dispensations were incorrectly operated.

Yet workers will also be scrutinised, in that if HMRC deems an overarching contract invalid, all expenses payments will need to be made under deduction of tax.

Former tax inspector Bob said that depending on the circumstances of each case, HMRC will decide whether or not the payment of the lost tax should be backdated.

A spokesman for HMRC confirmed it would adopt a tougher line with umbrellas, given that industry said their compliance levels were "poor" in consultation.

"HMRC will be looking at targeting compliance resources against non-compliant businesses in this area to ensure that they are complying with the travel expense rules.

"HMRC will also be looking at ways to improve consistency around processing dispensation applications in this area and the levels of scale rates for subsistence
that are agreed," the spokesman added, reflecting after Monday's PBR.

In addition, Mr Jones said, HMRC will scrutinise the dispensation in force, how the umbrella is operating within the terms of that dispensation including, in particular, the record keeping.

"The fact that a dispensation avoids paperwork being submitted to HMRC places greater responsibility on the umbrella to work within its terms, in particular, maintenance of adequate records to satisfy HMRC," he said.

"Failure to act within the terms of the dispensation would generally be regarded as a failure on the part of the umbrella with the umbrella having pay any tax lost".

Adrian Marlowe, the director of Lawspeed, is another advisor facing the contracting industry who believes umbrella workers and their providers have not been entirely 'let off the hook'.

"I am informed that the government will now set up a task force with greater emphasis on compliance and dispensations," he wrote, in a editorial authored by the firm.

"The Pre Budget Report contained the welcome news that the government has decided not to change the tax reliefs on travel expenses, but that is not the end of the matter."

Paul Mason, the manager of the contractor division at Abbey Tax, agreed that the PBR was a "Great Escape" for umbrella workers, in the light of threats to target their tax allowances.

He too said umbrella companies should expect HMRC to "police them more effectively", indicating the absence of fresh proposals does not dictate action is not being taken.

Worryingly for some in the sector, signs of this tougher stance are already emerging, as HMRC is turning its back on simple, one-page dispensations for ones with more detailed requirements.

Mr Jones, who worked for the Revenue for 37 years, reflected: "I think that it is essential that umbrellas review their contracts and dispensations so that their house is in order before the taxman calls.

"Umbrellas may wish to apply to HMRC now for an updated dispensation – being proactive can often pay dividends."

Speaking after the PBR about the government's decision to leave the current rules for umbrellas, and jointly-owned, companies in abeyance, Anne Redston, visiting tax professor at London's Kings College, said: "This is not permanent, these are things waiting in the wings, they have not been thrown away and the probability is that they will reappear."

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