Why it's all change for umbrellas from April

A major point that has been lost in the cacophony of groans about the Travel and Subsistence tax relief clampdown relates to restrictions on salary sacrifice models that were passed into law as part of Finance Act 2015, writes Marc Scott, a director of umbrella company Liberty Bishop.

Already time-tabled to end

The umbrella model as we currently know it was already time-tabled to end on 6th April 2016, and that was the case even before the initial consultation on the T&S restrictions began back in 2015. The reason for this is that Finance Act 2015 (which came into effect at the beginning of this current tax year, last April), contained restrictions which effectively ban ANY AND ALL expenses being offset through PAYE on an ongoing basis from April this year, if the payment model in question qualifies as a ‘salary sacrifice scheme’ (see sub-section 5b of section 289A of the Act). And umbrellas, as we currently know them, ARE salary sacrifice schemes, so that effectively means that from April 2016 the current umbrella model reverts to a simple outsourced PAYE model, with no expenses at all being able to be offset on an ongoing basis to reduce the workers weekly or monthly tax bill.

So if you think about it, it’s actually quite odd that there’s been so much panic from umbrella companies and others about umbrella workers losing out on T&S and how we’re going to accurately assess Supervision, Direction, or Control (SDC), given that there’s already a blanket-ban on umbrellas offsetting any expenses which is due to kick-in at the same time as the narrower T&S restrictions.

Only one place to offset expenses

In reality, if you assess the impact of these T&S restrictions in the broader context of the restrictions that have already become law under Finance Act 2015, the issue of whether or not an umbrella worker is under SDC only determines whether or not the worker can legitimately offset T&S expenses at the end of the tax year via self-assessment, since the end of year self-assessment will be the ONLY place where any expenses incurred by umbrella workers can be offset. In reality then, it’s a non-issue for the umbrella company as to whether the worker is under SDC on the role, because the umbrella won’t be offsetting the expenses as part of its service anyway, irrespective of their SDC status!

Of course, all of this is only true if we’re talking about umbrella companies as we currently know them, where their structure is such that they qualify as a ‘salary sacrifice model’ due to the way in which taxable salary is sacrificed for tax free expenses. I suspect that there will be some providers that try to come up with new types of umbrella models that don’t meet the definition of a ‘salary sacrifice scheme.’

Where SDC won’t be a non-issue

In that scenario and with these models hoping to be out of scope of the definition, SDC wouldn’t be a non-issue because there would be scope for T&S (and other expenses) to be offset on an ongoing basis through the scheme’s PAYE process. However, given the very high hurdle that HMRC have set for a worker to be deemed to genuinely lack SDC and therefore be entitled to T&S, and given that T&S claims make up the majority of claims made through an umbrella, even a new non-salary sacrifice umbrella model is unlikely to offer much more tax-efficiency come April than a salary sacrifice-type umbrella that is nothing more than standard PAYE. This is precisely the reason I don’t think these new umbrella models will have much of a shelf life.

Nothing more than a PAYE bureau

The simple reality is that come April, the umbrella model becomes nothing more than an outsourced PAYE employment model, regardless of what extra restrictions the government also introduce around T&S; it’ll be an alternative to the recruitment agency employing the workers directly under their own PAYE, but not anything more tax-efficient than agency PAYE . Incidentally, the PAYE  umbrella company’s value will be in it taking on the employment and insurance responsibility rather than leaving this to the recruitment business – a responsibility that recruiters generally don’t want.

If workers want tax-efficiency - and I’d say that that sits pretty high up on their list of priorities - then workers need to be looking in the direction of setting up their own limited company (PSC). Of course, the T&S restrictions apply here too, so I’m not necessarily saying that a PSC worker will get that tax-efficiency from claiming tax relief on T&S expenses. And since relief for T&S will be tied into IR35 for PSC workers, it’s a fair bet that if they’re not giving themselves T&S relief then they’re probably not paying themselves in dividends either!

Limited’s pros and cons (continued)

However, what the PSC option does give the worker is access to the benefits of Flat-Rate VAT registration and since this isn’t linked to employment status, there’s no convoluted test for the worker to undertake in order to determine their eligibility. Access to the flat-rate scheme is determined by simple numbers (by the company turnover), not by complex employment law that is open to interpretation.

So the million dollar question is this: why would an umbrella worker want to stick with any form of umbrella solution post-April, and have to therefore flap about and flounder with the complexities of employment status law, when instead they could take the much easier route of just paying themselves as an employee under their own limited company and still be better off due to flat-rate VAT?

Of course, not everyone will be suited to a limited company (the worker might not be allowed to be a company director or their contracting life might be too short, for example), but it’s certainly an option that most umbrella workers should at least consider and investigate. And if agencies would like to decrease the likelihood of their workers asking for a rate increase to boost their retention, it’s probably in the agencies’ interests to get their umbrella workers to take advice on this option too.

Editor's Note: Related Reading -

Contractors' Questions: Who's liable if I claim expenses but am 'SDC'?

Contractor tax review 'long overdue'

How the curb on contractor expenses might play out