Changes to rules governing employer HMRC dispensations could jeopardise umbrella companies, according to industry experts.

The first change was announced in February when Her Majesty's Revenue & Customs (HMRC) said that dispensation agreements between employers and HMRC could be revoked retrospectively. This could leave some umbrella companies owing HMRC large amounts of tax.

Marc Morris, head of commercial strategy at umbrella company Parasol, said the changes 'had real teeth'. "This could put many small companies out of business overnight," he predicted. Martin Portnoy, a partner in Ernst & Young's corporate tax consulting division, told Recruiter: "This issue could be bigger than the MSC (managed service companies) legislation."

Portnoy's comments came following the HMRC announcement which said that where employers were either not being truthful when applying for a dispensation, or not policing it properly, the dispensation could be revoked from the date that the agreement was originally agreed.

Barry Roback, managing director of JSA Chartered Accountants, told Recruiter that umbrella companies were in the firing line. "I guess they are firing a warning shot. They are saying 'Guys be on your toes, and make sure you play by the rules'."

Speaking at a Brookson roundtable event held in London in February, Ged Mason, group chief executive at Morson said: "Dispensation is the next big issue."

HMRC's concerns about umbrella companies were confirmed in last week's Budget, when the Treasury warned about the growing use of umbrella companies to obtain tax relief for travel expenses that would not be available to other workers.

It said it would monitor the use of these structures and, if necessary, consider action in the future.



HMRC grants dispensations to employers for certain expenses incurred by employees such as hotel bills, meals and travel. This allows umbrella companies to reimburse their contractors many of their expenses, effectively boosting their take home income.