Autumn Statement 2014 – How will it affect Umbrella companies?

In today’s Autumn Statement, George Osborne announced that “the government will stop tax relief from being claimed on reimbursed business expenses when they are paid in conjunction with a salary sacrifice scheme”. The statement further commented that “the government is also concerned at the growing use of overarching contracts of employment by employment intermediaries such as ‘umbrella companies’, which allow some temporary workers to benefit from tax relief for home-to-work travel expenses that is not generally available to other workers. The government will review these arrangements and publish a discussion document inviting representations from interested parties to inform potential future action.”

In practice these two go hand in hand. Umbrella companies are common place in the temporary workforce sector and are structured so that they can take advantage of the tax expenses rules which, within certain parameters, allow travel costs to a temporary workplace to be reimbursed tax free. Umbrella companies structure their workers’ remuneration as a combination of salary and reimbursed expenses which gives rise to a PAYE and NIC saving including the employer’s NIC which is a significant company cost at 13.8%.

Often these arrangements are put in place via salary sacrifice arrangements, but not always. To achieve the tax savings, Umbrella structures rely on the worker being treated as an employee of the Umbrella company. This employment is achieved by using overarching contracts of employment. Well advised and structured Umbrella companies will have structures in place which mean they are fully compliant with the law but many are not. Compliant or not, HMRC has, for a long time, not liked such arrangements. It has had high profile success at the First Tier Tax Tribunal in the well know Reed case.

Any removal of the ability to achieve these tax savings (especially to save the 13.8% NIC) will have a significant impact on this sector as it will be a direct cost to umbrella companies.

The taxation of travel and subsistence expenses was part of the Office for Tax Simplification review which produced its final report earlier this year. Wholesale change to the travel and subsistence regime would be a major exercise in tax terms and still subject to open consultation. However, with today’s announcement, HMRC put that to one side (for now) and has instead picked on the area where it sees there is abuse.

Such measures will have direct impact on the costs of Umbrella companies and take home pay of its workers. Who will end up bearing the cost? Will we see the end to Umbrella structures? What impact will it have on employment agencies relying on umbrella companies to make the intermediary tax changes from Budget 2014 more manageable?

We have no timescales as yet and the devil will be in the detail (which is awaited) to see the scope of any consultation and what measures will be put in place outside of consultation.   We would expect more detail over the coming weeks maybe at the same time as the publication of the response to the recent consultation on scrapping the business expenses dispensation.