On 6th February, during parliamentary questions Guto Bebb, Conservative MP for Aberconwy asked David Gauke MP, Financial Secretary to the Treasury: “what steps his Department is taking to stop agencies using umbrella companies to manage the payroll function of companies within the construction industry”
Mr Gauke MP responded: “Umbrella companies have been a part of the UK labour market for many years and, when operated responsibly, provide a useful conduit through which payments, including tax, can be made. As such, Her Majesty’s Revenue and Customs (HMRC) are not taking steps to stop agencies using umbrella companies to manage the payroll function of companies within the construction industry.
However the Government is 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 published a discussion document on 16 December 2014 inviting representations from interested parties to inform potential future action. “
This has hit the headlines with startlingly different viewpoints.
Julia Kermode, CEO of the Freelancer and Contractor Services Association (FCSA) applauded the comment with the following statement: “It is refreshing to hear that the Government has no intention to stop agencies using umbrella companies and that it recognises the value of umbrella companies and the important role they have in supporting the UK’s flexible labour market.
Steve Murphy, General Secretary of UCATT, said: “Rather than stand up against the spivs and racketeers who are avoiding millions in taxes and preventing construction workers from making ends meet, this Government lying down and letting them walk all over them.”
Everyone seems to have their own version of the truth and we are talking about three critically important issues, yet it is rapidly turning into something of a battle of words.
Those issues are;
- The rights of low paid workers to be paid at least the NMW
- Recruiters who have been led into working with unrealistic employer costs
- A massive and probably irretrievable loss to the exchequer
So, how can anyone figure out which side is telling the truth?
The following is extracted from the current HMRC consultation document, Employment Intermediaries: Temporary workers – relief for travel and subsistence expenses.
The government cannot condone the use of arrangements in the temporary labour market that are designed to secure a tax advantage that would not otherwise be available to the individual or business concerned. However, the government also wants to ensure that any action it takes does not undermine genuine arrangements. It is therefore exploring possible changes to the tax rules in this area. In weighing up the merits of any proposal, the government wants to ensure that:
- The long established principle that the costs of ordinary commuting are not subject to tax relief is maintained
- The change does not undermine the effective operation of the temporary labour market or of intermediaries that do not misuse travel and subsistence relief
- That any changes will not result in intermediaries shifting into new contrived structures to achieve a tax and NICs saving.
Later, when speaking about the evidence gathered in recent investigations into umbrella companies;
Based on analysis of a group of over fifty of the larger umbrella companies, for around a quarter of umbrella employees, the fee due to the umbrella company is greater than the travel and subsistence relief in relation to their employment.
More than a tenth of umbrella company employees – the lowest paid – have annual income and expenses of below the annualised NICs Primary Threshold, and are unlikely to be able to claim significant, or possibly any travel and subsistence relief at all.
So the fact is the government is intent on taking action against umbrella companies which flout the law, and it is helping low paid workers by raising the level at which a worker pays tax and NICs and has done so for the past five years. For years then, there has actually been no benefit whatsoever for low paid workers who have been paid through an umbrella company.
Lastly, and most damningly, an analysis by HMRC of the payrolling of workers by over fifty of the larger umbrella companies, found that while the agency saved a little on employer costs when paying low paid workers through an umbrella company, the umbrella company gained more in fees than the workers gained in the promised tax savings.
With the creation of one or more targeted anti avoidance rules (TAARs) looming on the horizon, it really must be time for recruiters to write their own the story, and this starts by stepping into the light and away from the ugly shadow cast by a substantial number of umbrella companies operating in their industry today.
By Carolyn Walsh
A stakeholder in HMRC, HM Treasury and Office of Tax Simplification consultations since 2004 Director of CWC Solutions Group which has been providing payroll bureau and employment intermediary services since 1999. Eight years service at HM Revenue & Customs