Death of Umbrella? I don’t think so.
Last week’s budget announcement contained a very important message for Umbrella Companies and Directors of PSC’s. In fact, anyone who responded to the recent discussion document on overarching contracts would have received an email spelling it out.
It is a continuation of a direction of travel that the treasury and HMRC have been on for some years, however this time it’s clear that they have listened to the collaborative response of the industry to try avoiding unintended consequences.
What is this message? From the 6th of April, 2016, it’s the current government’s intention to remove tax relief completely on travel and subsistence for workers who are supplied by an intermediary to a third party and who are working under the supervision, direction or control of the hirer. So right now this includes employees of an Umbrella Company or Directors of personal service companies (PSC’s) who are either directly controlled by the client or where the client has a contractual right to supervise, direct or control.
So where does this leave the industry? In my opinion, exactly where it should be! We hear it everywhere; the flexible workforce has been one of the biggest contributors to economic recovery in the UK. The ability for businesses to strategically access the right skills and experience when they need it, for as long as they need it, has allowed those companies to control costs, win business, enter new markets or deliver new products and services all of which has had a significant positive impact to UK Plc. This is where temporary assignments and contracts work really well.
Where contingent labour does not work is if the workers do not have the relevant skills or experience to provide the services and the client has to have an input as to how the work is done, rather than just briefing what needs to be done and ensuring work is completed safely. This automatically shines a spotlight on low paid, low skilled roles that are not really suitable for contractors. It’s not news that HMRC has a problem with this part of the sector being shoehorned, and in some cases forced, into contrived avoidance schemes with no understanding as to how they being paid or what the relationships are.
Firstly, looking at umbrella employees, supervision, direction and control are a necessary ingredient in any employment cocktail (usually served alongside a dash of personal service and topped up with mutuality of obligation) so nothing new there. The key is that it’s the employer, not the hirer, who should be doing the supervising. These changes present a unique opportunity for clients, agencies and umbrellas to control the supply chain much more effectively, which will have many more benefits than simply employees being able to claim travel and subsistence.
No PSC, genuinely outside of IR35, should be subject to the supervision, direction or control from the client anyway, but there will be a separate test – likely to be the same as that set out for the intermediary’s legislation. In the worst case scenario the Director may not be able to claim T&S expenses, which will have an impact on earnings, but these are not the only expenses incurred by a PSC, making the model still perfectly viable.
One of the biggest risks for agencies will be considering PSCs as a ‘way out’ because they are passing the risk on. HMRC have made it clear that they have the existing MSC legislation, alongside new targeted anti-abuse rules, to effectively monitor any sudden spikes and with the new intermediary reporting requirements they have the mechanism in place to know exactly what’s going on and connect the dots.
Whilst some sectors will most certainly be affected more than others, agencies concerned about the announcement should be engaging with their suppliers as early as possible to come up with a plan of how to move forward commercially whilst effectively controlling risk, which may involve wholesale change, evolution of their existing processes or possible even no change at all.
In conclusion both umbrella and PSC, if used properly, have a life past April 2016 but potentially the industries, structures and relationships could look very different.
Liquid Friday Ltd