If you’re an IT contractor working through an umbrella company, you may not be aware of the turmoil within the industry following a Government consultation last year. The question asked was whether to continue to allow contractors to offset travel and subsistence expenses against their taxable income – the single benefit that makes working through an umbrella company so attractive and the removal of which, threatened to wipe the industry out in a stroke.
In the Autumn statement 2014, the Chancellor George Osborne stated that ‘the government will change the rules to restrict travel and subsistence relief for workers engaged through an employment intermediary, such as an umbrella company or a personal service company, and under the supervision, direction and control of the end-user. This will take effect from April 2016 following a consultation on the detail of the changes.’
In response, some predicted the end of umbrella companies within 12 months, with a large migration to contractors operating through their own limited company. Others speculated about how the government would define and police the ‘supervision, direction and control’ given the failure of IR35 legislation to collect any significant tax revenue. Optimistic voices noted the use of the word ‘restrict’ rather than ‘remove’.
But a lot hinged on the result of the 2015 General Election as the Conservative and Labour parties had quite different policies on umbrellas. It’s fair to say that as David Cameron walked back through the door of 10 Downing Street on May 8th, most umbrella company owners were breathing a sigh of relief. The Tories are more sympathetic to employers who request flexibility in their employment affairs, but as we know now, have large spending commitments to meet without raising taxes…which could very well lead to removing tax reliefs instead.
What is the impact for IT contractors working through umbrella companies?
Nevertheless, the Finance Bill 2016 will contain legislation that affects the industry with further consultation taking place over this summer. Whilst no-one can guarantee the outcome now, we think it’s useful for contractors to think about the following:
- If you are planning to contract for the long term (i.e., more than 12 months), it is highly likely that a limited company will be a more tax-efficient way to work and less likely to be impacted by legislation. This option is generally advised for anyone earning more than £15 per hour too but do always discuss your personal circumstances with your accountant.
- If working through an umbrella company suits you better (maybe you prefer the lack of paperwork or aren't sure how long you’ll contract for), you might want to check their credentials more carefully to make sure that their practices won’t disadvantage you if there is a clampdown.
- Be wary of unsubstantiated claims about being 100% compliant or guaranteed take home pay levels, and run a mile from any company that says you don’t need to keep expense receipts, or encourages you to claim expenses that you don’t actually incur.
- Ask your recruitment agency to explain why they recommend the company and what’s in it for them.
- Make sure that you’re clear on your own employment status. Who is your contract of employment with and does it include guaranteed hours?
- There are many well run, ethical umbrella companies but they are hard to distinguish in amongst the slick websites. Members of the FCSA have to pass the most rigorous audits.
- If you are entitled to claim expenses, make sure you do, whilst you still can! Research from the FCSA estimates that 40% of umbrella contractors never even bother to claim the tax relief to which they’re legally entitled.
If we could crystal ball gaze for a moment, we suspect that there will be some action to clamp down on the unethical few who bring the umbrella industry into disrepute, but that the tax take from the majority of highly skilled, well paid contractors will prove to be too valuable to the Government to risk.
But there are no guarantees so make the decision on whether to use an umbrella company based on your own appetite for risk, what your long-term plans are and whether it will be tax-efficient based on the expenses you genuinely incur.
Keen to learn more? On the KDR blog, there are more considerations when picking an umbrella company here and you can read about the benefits of setting up your own limited company here.