Hitting Umbrella Companies – Why Chancellor is Crazy to Do It

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Umbrella Companies Advice for Contractors
Umbrella Companies Advice for UK Contractors

Hitting Umbrella Companies

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We got the news recently that the Chancellor was hitting umbrella companies by stopping them claiming travel and subsistence expenses against tax for their contractors.

The Chancellor reckons that this will bring him in an extra £440m. This is a pittance in tax terms yet could cause a lot of damage to our industry.

It is also likely to be incorrect.

Financial Benefits of Using an Umbella Company

This takes away the main financial benefit of using an umbrella company for those caught by IR35.

Contractors pay a fee of over £100 a month to umbrella companies, basically just to pay them.

That was fine when they were able to claim that travel and subsitence allowance against tax.

Now, it may well be that overall, contractors may be out of pocket by using an umbrella company.

Umbrella Company Contractor Options in April
Umbrella Company Contractor Options after April

Conservatives Attitude to Umbrella Companies

It was felt that the Government liked umbrella companies.

After all, if those 200,000, or more, umbrella company contractors were not in them and used personal service companies, or even paid the IR35 tax, they would have to deal with more than 200,000 individuals.

Surely it is easier to deal with, and legislate for, a few hundred umbrella companies.

Thos companies do a lot of the Government’s work for them. They extract PAYE tax from all those contractors, between them, and send regular huge cheques for tax and national insurance to the Exchequer.

If they have to let contractors claim a few odds and ends against tax so be it. It was worth it.

So, umbrella company owners and senior executives thought anyway.

Umbrella Company alternatives
Umbrella Company alternatives for UK contractors

Umbrella Companies as Tax Avoidance

However, that is not what Chancellor George Osborne, or the Conservatives, thought.

They saw the umbrella company contractors as tax avoiders and their umbrella companies as those helping contractors to avoid tax.

The Government’s figures on the tax this will bring in is likely to be wide of the mark.

The Treasury figures would assume that all the contractos who are in umbrella companies will stay in them but just pay more tax.

Incentivised Contractors to Leave Umbrella Companies

However, they have just incentivsed them to leave their umbrella companies.

Contractors have to pay a monthly fee of over £100 a month to their brollies.

However, this was more than offset by the amount of expenses that they could offset against tax and the main expense was travel and subsistence.

Now that is to be taken away from them they will be doing a bean count to see if it is still worthwhile staying with their umbrella companies.

Already an IT contractor earning the average of £425 a day would be paying an average of £10,000 a day less in tax in a personal service company compared to an umbrella company.

This could now rise to as much as £15,000 a year.

Contractor Umbrella Companies
Contractor Umbrella Companies which avoid IR35 tax

Hitting Umbrella Company Contractors Hard

If umbrella company contractors are paying more to their umbrella companies than they are getting in tax expenses deductions, some of them, at least, will look to jump ship.

Some of those who are in brollies are there becasue they are caught by IR35 and couldn’t set up a personal service company for themselves.

However, some of them are in brollies because they don’t know if they are caught by IR35 or not.

Some of those may now decided that the safety of being in an umbrella company, and not have the chance of being investigated for IR35, has now become just too expensive.

Contractors Operating Through Personal Service Companies

If a quarter of the umbrella company contractors, i.e. 50,000, decided that they would take their chances and now operate through a personal service company, they would each pay around £10,000 less in tax than they pay now and that would cost the Chancellor £500m.

That’s more than the £440 million that he hopes to gain from taking away the travel and subsistence allowance  from umbrella company contractors.

It remains to be seen what umbrella company contractors after April.

However, one thing we know for sure is that this measure won’t increase the numbers of contractors in umbrella companies.

The other thing we know is that this is a powerful incentive for contractors to leave their umbrella companies and head for anoher tax vehicle, whether it is personal service companies or limited partnerships for contractors.

Hitting umbrella companies is unlikely to bring in much more tax, if any.

 

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