Umbrella contractors, now’s the time to probe

It may be PSC contractors who want answers about how to operate after April 2016, but with umbrellas admitting that their entire business model could be about to change due to legislation published last month, it’s time for umbrella contractors to ask some questions of their own, writes Duncan Strike, a director of Intouch Accounting.

From a standpoint of tax and accounting – an area I’ve got 30 years of experience in – it is right to realise that the existing model that umbrellas use does not appear compatible with what the government wants to do from April. Umbrella companies have, without doubt, traditionally offered a professional and valuable service to many flexible workers.

Umbrellas considering new models

But as three fiscal statements in a row from George Osborne have shown, the Treasury is concerned about the umbrella sector and the potential within it for tax abuse, ‘illegitimate’ tax relief claiming and, away from the professional contractor sector, exploitation of workers. Aware of the suspicion that they’re under from the powers-that-be, umbrellas have started considering new models of operation.

Some are looking at taking a larger chunk of their workers’ cash as a fixed element of expenses; others are looking at other ‘solutions’ and a few are looking at the Employment Deduction Model (EDM), even though it was rejected a few years back as a means to be self-employed paying PAYE.

What does it mean for you?

From an umbrella worker’s perspective, the risk is that you may be forced to adopt one of these ‘replacement’ models – an untested, reactionary structure – at least until the legislative landscape (officially confirmed for the first time on Dec 9th) settles.

It should be made clear to umbrella workers that if, inadvertently, you sign up to a replacement model and, ultimately, it fails in its intended outcome, it might be you - the individual worker - who HMRC would approach, via a self-assessment enquiry.

Even more certain is that, due to legislation unveiled before Finance Bill 2016, clauses parachuted in at the last-minute have the effect of removing tax relief at source for expenses that are part of a salary-sacrifice. Umbrellas have adopted this sacrifice model to convey the tax benefits of relief on expenses but from April 2016, they will not be able to pass on the tax relief at source.

HMRC argues that legitimate expenses can then be claimed via self-assessment and that no legitimate claim will fail. But as many umbrella workers do not file tax returns, it seems likely that they will either fail to obtain relief or that relief will be denied when the returns are submitted. Combine this legislative change with the SDC proposal, under which existing tax relief on travel and subsistence expenses for umbrella workers is to be disallowed, and the bottom line for the average umbrella contractor doesn’t appear to be in good shape.

The changes umbrellas might have to make due to the Finance Bill could adversely impact limited company contractors. Specifically, there is an expectation that the less reputable umbrella model providers will attempt a wholesale switch to a PSC-style solution, potentially leaving legitimate PSC workers to suffer from the backlash of attempts to counter the legislative threat.

The trio of questions brolly contractors should ask

Whatever happens in the coming weeks or months regarding how you operate, if your umbrella company wishes to change your pay structuring, then question them carefully:

• Is the structuring change accepted by HMRC?
• What proof does the umbrella have from HMRC to evidence their answer with?
• Will the umbrella indemnify you?

Beyond these questions, remember that, as reputable brollies are at pains to point out, don’t be fooled by ‘HMRC-approved’ or ‘approved by tax counsel’; as neither exist. And as most umbrella contractors will already be thinking, it is vital to take a considered look at all your options as to how to structure yourself post-April 2016 before you work out what’s best and worth committing to it. Contrary to what we might be expected to advise, PSCs may not be your best bet.

When in doubt, seek independent and impartial help to try to get to grips with what and how you are being paid and try to understand the implications of the legislative changes – and potentially your employer’s reaction to them, so you can continue to make informed decisions.