Umbrella Companies Budget Blow for UK Contractors

umbrella companies for UK Contractors
Umbrella Companies for contractors

Umbrella Companies Budget Blow


Umbrella Company Contractors are wating to hear the outcome of consultations between the Government, HMRC and representatives of those in the contracting profession as regards umbella company expenses for contractors. This is due to the latest umbrella companies budget blow.

There are two main types of contractors who use umbrella companies.

Firstly, there are those who don’t want to do their own admin, VAT and end 0f year accounts. They are happy to pay an Umbrella Company to do all their admin for them. They want to concentrate on contracting.

They may also want peace of mind. They want to avoid a potential IR35 investigation which could take years and end with them paying tens of thosuands of pounds in back tax.

<>Contrh2actors Caught by IR35 Tax

Secondy, here are those who believe that they are caught by the IR35 Tax.

The Government set up IR35 tax in 1999 to catch what they saw as ‘disguised employees’.

There were people leaving companies on a Friday as employees and starting on a Monday as contractors doing exactly the same job at the same company at the same location.

This was a ruse and was beneficial, in tax terms, to both the ‘contractor’ and the employer. The Treasury and the UK taxpayer lost out so the Government put in the IR35 legislation to catch those ‘disguised employees’.

Professional Contractors Group

However, IR35 caught many more contractors in the net than they had intended. The Treasury, the Government and HMRC, though, liked the new tax funds that were coming in from contractors.

They decided not to amend the legislation despite the best efforts, including High Court cases, of the Professional Contractors Group (now IPSE).

So, did those contractors deemed to be caught by IR35 just pay the IR35 tax then?

Very few did. Information from the Government showed that the Government picked up  just a few million pounds a year from the IR35 Tax. That’s just a pittance in tax terms and hardly worth legislating for.

So, what did those contractors caught by IR35 do instead then?

Set up Umbrella Companies

Some clever people set up contractor Umbrella Companies. These are a ruse to allow contractors to be able to at least set off some of their contracting expenses against tax.

If the Government set up the IR35 tax to catch out ‘disuised employees’, some clever people set up umbrella companies where the contractors became ‘disguised contractors’.

They worked normally as contractors but for tax purposes they were treated as PAYE employees of the umbrella company.

There are even devcies where they get holiday pay as a permanent employee as all permanent employees must legally. This is paid for by themselves, of course.

These umbrella companies are ruse of course. After all what other companeis charge a monthly fee to their employees just for paying them.

Offsetting Travel and Subsistence Expenses Aganst Tax

Being a ‘permanent employee’ of the umbrella company meant that the umbrella companies were able to offset certain expenses against tax on behalf of the contractor and they would refund that to them.

That meant they could offset more against tax than they would have if they paid the IR35 tax.

The expenses they could offset against tax include travel expenses, subsistence expenses, pension costs, equipment costs and memberships of trade organisations like the Professional Contractors Group.

Umbrella Companies Thought Government Were Happy with Them

It waas thought that the Government and HMRC were OK with this arrangement. It was thought by umbrella company owners that the Chancellor and HMRC were happier dealing with a few hundred umbrella company contractors than 200,000 individual contractors who currently use umbrella companies.

They thought that the Chancellor and the Government were happy to allow these extra expenses that an IR35-paying contractor couldn’t claim because of the bonus of getting regular huge tax cheques from the umbella companies monthly rather than getting individual tax cheques from individual contractors after the year-end.

After all, in their IR35 review the Government decided against abolishing IR35 as there was a danger that contractors would leave their umbrella companies and start up limited companies.

The Government gets £10,000 a year more in tax from umbrella company contractors than limited company contractors. As there are 200,000 of them that’s £2bn. We’re talking about serious money here.

Travel and Subsistence Allowances Under Threat

This, however, was wishful thinking . The Chancellor and HMRC are greedy and wanted more. Contractors are not among those, like those who operate hedge funds or use offshore locations that tthe Conservative hierarchy see as people that need help taxwise.

So, the travel and subsistence expenses are now under threat from the Chancellor. He said in gis last budget that the Government wanted to take away the ability of umbrella companies to claim travel and subsistence allowances on behalf of their contractor ’employees’.

The Government is taking a big risk here as this is one of the main reasons for contractors being in umbrella companies.

There is the danger that contractors would leave their umbrella companies and set up limited companies where they can claim all sorts of expenses against tax.

Right to Claim Travel and Subsistence Expenses Against Tax

So, the Government intend to take away the right to claim travel and subsistence expenses against tax from the owners of what they call personal  service companies, using limited companies.

They are still taking a chance as there are lots of other expenses that personal service company contractors can claim.

Why would contractors continue to pay their umbrella companies a monthly fee just for paying them when they are paying them more than the umbrella company can save them in taxes?

Ir35 Investigation

Of course, many will remain in umbrella companies as they don’t want the hassle of an IR35 investigation and they are happy to pay a monthly fee for someone to take over all their admin.

However, others will be tempted by the lure of using a limited company again and look to change their way of working to make sure they are outside IR35.

This is the danger for the Chacellor after his budget.

He is still at a consultation stage as regards taking away the travel and subsistence expenses.

Any legislation won’t comeinto effect until April in 2016.

Personal Service Companies Just for Contractors

Of course the poor old Professional Contractors Group (now IPSE) have blundered in again.

They are lobbying the Government to have a type of limited company just for contractors who are outside IR35.

That would be lining up all those whom the Government want to attack in one entity.

When the Government are looking for more tax it would be like shooting fish in a barrel. The Government must reckon it is like taking candy from kids dealing with them.

So, we await the latest umbrella companies budget blow for contractors at the end of the consultation period.  Thank goodness IPSE’s latest idea is not already in place or it would be too easy for the Government to punish contractors.



Please enter your comment!
Please enter your name here