FROM MAY'S RECRUITER MAGAZINE

Recent changes to the law around T&S have made the future look rather stormy for umbrella companies, reports Colin Cottell

Umbrella companies whose business models depend on maximising the take-home pay of workers by paying travel & subsistence expenses tax and National Insurance free, face a stormy and uncertain future. This ‘new world’, as it has been described, has been brought about by a double-whammy of legislation that come into effect on 5 April.  

In his Budget speech in March, the chancellor confirmed that from last month [April], agency and contract workers engaged through employment intermediaries were now no longer able to claim T&S expenses for travel from home to work, which will significantly reduce their take-home income. This has been much discussed and relatively well-documented. 

However, some working in this area have warned that people have taken their eyes off the ball, and that another equally important and potentially damaging piece of legislation has slipped in almost unnoticed.    

“People have fixated around how to get around the new T&S regulations, which will enable workers to continue to claim for site-based expenses,” says Barry Roback, director of accountancy solutions provider Anderson Group. However, according to Roback, “all those efforts add up to nothing” because of another [check] that has “snuck in under the radar”.  

The legislation contained in the Finance Act 2015 means that from last month (April), even if they qualify for tax-free T&S expenses under the new T&S rules, workers will no longer be allowed to receive T&S expenses tax-free, where a ‘relevant salary sacrifice’ arrangement is in place. (See 'Umbrellas facing double-whammy, below, for more details on the practice.) John Sheehan, tax director at accountants UHY Hacker Young, explains the government’s rationale behind the two pieces of legislation.

“HM Revenue & Customs saw the mischief in workers that said ‘Don’t pay me as much salary, but give me tax-free travel expenses instead’. A worker normally paid £10 an hour would happily settle for £9 an hour plus £1 in expenses to which tax relief could be added, thereby boosting their net income,” Sheehan explains. 

The new rules were also directed at some umbrella companies, who according to Sheehan “were really playing the travel and subsistence game” and based their business model on stretching the limits of the rules on expenses both to boost their own income and to attract contractors by maximising their tax-home pay. 

As he explains, under the previous rules, umbrella companies who paid the worker also benefitted by saving on National Insurance (NI), leaving the Exchequer as the only loser, who collected tax and NI on a lower gross amount (£9 rather than the £10 in this example). 

Although Sheehan doesn’t see the new rules as “the death-knell of the umbrella”, he says they spell bad news for umbrellas, some of whose business models “will no longer be viable”. 

He predicts that we “will see a drop in the number of umbrella companies offering services”. 

Roback takes that point further to contend that the implications of the provisions for ‘relevant salary sacrifice’ will be profound for umbrellas. Based on his interpretation of the new rules, where expenses vary, as they inevitably do in a contracting environment, “there is no practical way for those expenses to be paid tax-free”. 

“There is now no strong reason for there being umbrellas apart from outsourcing of payroll, which of course demands a lower fee,” adds Roback. 

Amanda Hobson, managing director of payroll and back office services provider EasyPay Services, says: “In terms of umbrellas offering PAYE models with T&S via salary sacrifice, that is the end of umbrellas.”  

Hobson says umbrellas are taking drastic action in response. “Some are offering PAYE plus expenses paid by the agency or hirer and effectively operating like a payroll bureau. Others are offering CIS [construction industry scheme] models, and others are setting up accountancy services, where they are forming people into personal service companies [PSCs].” 

Hobson says CIS models, where workers are being classed as self-employed, and PSCs are becoming particularly popular in the construction sector, where salary sacrifice arrangements have been common. 

This is a dangerous game, Hobson warns, since under the new T&S rules for expenses to be paid tax free, all such workers must be genuinely mobile workers, or not subject to supervision, direction, or control – something that she questions is always the case. 

However, despite being faced with this double-whammy of legislative changes, umbrellas tell Recruiter they will adapt to the new circumstances and are confident they still have a vital role to play in the flexible labour market. 

Matthew Brown, managing director of giant group, an umbrella company, points out that many umbrella workers don’t claim expenses at all – 50% to 60% of giant’s umbrella workers – so won’t be affected. 

And further, according to Damian Broughton, managing director of contractor accountancy and payroll firm Danbro, because mileage expenses fall under separate legislation and are therefore not covered by the salary sacrifice rules, mobile workers, say a meter reader who moves from house to house during the course of their daily duties, will still be able to claim mileage expenses tax free for travel during their working hours, though not from home to work. 

And while, anecdotally, Broughton says “we have heard of some smaller umbrellas whose business model is no longer commercially viable,” he insists we are “not seeing the demise of the umbrella. 

“Contractors still need a vehicle to work through to carry out an assignment or a contract, and that is still potentially an umbrella solution.” And he while accepts some umbrella workers have moved into PSCs, the numbers have been fewer than many were anticipating. The reasons many workers choose umbrellas, and will continue to do so, go beyond just tax efficiency, he argues. “They are an easier way for them to work, avoiding the further obligations of a PSC, for example of being a director,” he says. Umbrellas have other attractions too, says Brown. “Agencies are reluctant to have workers on their payroll with all the direct and indirect costs associated with this. Their margins will materially suffer.”

Crawford Temple, chief executive of PRISM, a trade body for service providers and intermediaries in the temporary labour market, says he is confident umbrellas will adapt to what he terms ‘the new world’. “The Finance Act is a nuisance because umbrellas will have to change their model, and how they work, and it does add a layer of complexity. They might have to change the way they operate, but the umbrella still survives,” he says. 

He adds that PRISM has developed two models, which he claims “have been signed off by the Revenue [and] that work for umbrellas and allow their employees to claim expenses tax free.” The first (referred to by Broughton above) allows some mileage expenses to be paid tax free. Temple says the second model gets around the rule that expenses can’t be paid free of tax where a worker’s general earnings vary in relation to the expenses reimbursed. 

However, Roback is not convinced that any of the new models are the answer. “I know they have come up with different new models, but only time will tell whether they work. Our view is they won’t,” he says. “Desperate people do desperate things,” he adds. 

Umbrellas have proved themselves resilient and flexible in the past, but the cumulative shock of the new T&S rules, along with the new rules on salary sacrifice, represents perhaps their greatest existential challenge yet.

UMBRELLAS FACING DOUBLE-WHAMMY

From 6 April agency and contract workers engaged through employment intermediaries are no longer able to claim travel & subsistence (T&S) expenses for travel from home to work. The exception is where a worker is a genuinely mobile worker, or not under supervision, direction or control (SDC) of anyone in the supply chain.

However, even where a worker is not under SDC, sub-section 5b of section 289A of the Finance Act 2015, means that where a 'relevant salary sacrifice' (RSS) arrangement is in place, from 6 April 2016 workers are no longer allowed to receive any expenses tax-free, other than mileage expenses, which are covered by separate legislation. RSS is defined as existing when a worker's general earnings vary with the expenses reimbursed.

• Want to comment on this article? Post your comments in the box at the bottom of the page and join in the discussion.