Crystal Umbrella

David Cameron’s coalition government is taking a hard line on those umbrella companies who flout the rules. Just like the previous administration, the current government are taking a zero tolerance stance with umbrella companies who operate schemes with the sole aim of minimising tax and NIC payments while topping up the take home pay of contractors with expenses.

For some time, many umbrella companies have actually been flouting the national minimum wage legislation by paying a lower rate than the national minimum wage specification of £5.80 per hour. As previously mentioned this low rate of pay would then be topped up with expense payments. Of course, the benefit for the umbrella companies is that they save on their employers’ NIC contributions. However, while at first glance it might appear that there is no adverse effect for the contractor as the take home pay is the same either way; on closer inspection the contractor is actually missing out on vital NICs which count towards future pension and state benefit entitlement.

The government have now taken steps to counteract this, with new legislation coming into force on 1^st January 2011. From this date these umbrella companies will have to pay their contractors the full national minimum wage.

The umbrella companies who have been taking advantage of the current loophole will have no choice but to adhere to the new rules. While their current practice is not illegal, it is viewed by many as unethical. Such schemes have created a two-tier umbrella sector with companies like Crystal Umbrella providing a service which exceeds the standards set for the industry while others operate schemes designed only to save themselves money without benefiting the contractors who use their service.

Umbrella company Albany went into administration yesterday following days of speculation. It is now hoped that Albany’s creditors, including many IT contractors, may actually receive some of the money which is owed to them.

It is believed that Albany got into difficulty when clients were unable to pay their bills thus resulting in a shortage of cash for Albany. Administrators Carter Backer Winter (CBW) said this led to a “knock-on effect” on contractors. Several Albany companies are involved: Albany EMEA and Albany Holdings are in administration. CBW are also acting as liquidators of Albany Employment Services and Albany Management. There has been no mention of Albany Technologies (UK).

John Alexander, CBW partner and joint administrator commented in a press release: ““We have only just been appointed so it is too early to be definitive. However, we are hopeful that there will be at least some dividend to creditors, including former employees who may also be entitled to additional amounts from the government’s redundancy fund where they have unpaid salaries.”

He also spoke of joint administrator, Melvyn Carter’s role to “ascertain the exact situation”. He confirmed that Carter would be contacting each individual creditor “within the next couple of days”.

Speaking about Albany’s foreign subsidiaries, Alexander commented: ““Albany has a number of foreign subsidiaries, particularly in the USA, Brazil, Canada, the Netherlands and also Asia-Pacific. These businesses are independent, stand alone, profitable and sound.

He concluded: “It will continue to be business as normal for them, although I am keen to hear from trade purchasers or anyone else interested in acquiring them. I can emphasise that this is not a ‘pre pack’ insolvency.”

For those contractors who want to retain their autonomy while achieving a reduction in their tax liability, an umbrella company could be just what they are looking for. Umbrellas are ideal for those contractors who would rather not work as a sole trader or set up their own limited company. Just think, you could wave goodbye to all that administration that would burden you if you were operating your own limited company such as expenses, timesheets, expenses, contracts, filing and tax calculations. By working through an umbrella you effectively become its employee while choosing for yourself which contracts to accept, what rates of pay to accept and the terms and conditions for your work.

Of course, these are not the only benefits of working through an umbrella company. Your umbrella will work with you to reduce your tax liability and can also offer you further cover such as public Liability and Employer cover in the event of any legal action based on services rendered. Many umbrellas can also offer extra benefits which are tailored to each contractor’s personal requirements. Such benefits include pension plans and health cover.

Crystal Umbrella makes sure its customers are aware of the guidelines that it is proud to work within. All umbrella companies have a responsibility to work within the HMRC guidelines. Crystal Umbrella makes sure that it also adheres to the HMRC benchmark scale rate for expense allowances. This means that our customers are at a much reduced risk of being subject to an HMRC investigation based on an artificially high and unrealistic dispensation.

There is to be a crackdown on gangmasters and umbrella companies who flout rules and abuse tax free allowances to appear cheaper than their legitimate rivals. This is being pursued by the Gangmasters Licensing Authority (GLA), which was formed to protect workers from exploitation in horticultural, agricultural, shellfish gathering and associated industries.

The GLA has now issued guidance to all relevant businesses with a twelve-week warning. Once this period is up, on 17^th February 2010, they will start to take action. If non-compliance is proven, details will be passed to HMRC to reclaim tax arrears alongside national insurance. Anyone found to have been breaking the rules can also expect to pay a large penalty.

Chairman of the Gangmaster Licensing Authority, Paul Whitehouse, said: “We have issued clear guidance and this industry has been given 12 weeks to ensure they comply. There are no excuses and we will come down hard on anyone who is operating illegal schemes from February 17 2010.

The GLA stated that the schemes they are looking into are often touted as travel schemes or travel and subsistence schemes. Often, agencies or umbrella companies who are bending the rules inform their members that these schemes are compulsory for anyone earning minimum wage. Often the expended paid have not actually been incurred and are purely a means of reducing taxable income. GLA believe more and more companies are using such schemes purely to benefit their own finances.

Many contractors will today welcome the news that those workers who use umbrella or limited companies will remain exempt from the agency conduct regulations. The Department of Business Innovation and Skills said there was “no significant evidence” to support the removal of this exemption. The state had worried that some agency workers were too vulnerable to remain exempt from the rules which were drawn up in 2003. There was fear that recruiters were actually advising their workers to opt out and thus those workers were losing the protection that the regulations provide.

The BIS said: “Once a worker has opted out they lose they protections afforded to them by the Conduct Regulations and may be vulnerable, for example, to non-payment of wages.”

BIS consulted with 350 individuals and businesses regarding this issue and found no “convincing evidence” of these concerns.

BIS stated: “Furthermore the evidence provided by the professional bodies that represent contractors and umbrella company providers is that any changes would have an adverse impact on legitimate contractors who actively choose their arrangements.”

It was also recognised that by including all contractors in the code of conduct would actually increase costs for contractors and add administration requirements with regards to the information that is required by recruiters under the regulations.

The Association of Professional Staffing Companies (APSCo) said: “The government has acknowledged that there is insufficient evidence of the opt-out being used to exploit vulnerable workers. This is an important victory for the recruitment industry. If the opt-out had been withdrawn, the red tape burden on recruiters and contractors of automatically having to comply with the Conduct Regulations would have imposed significant costs.”

HM Revenue and Customs brief 50/09 stated that non-compliant umbrella companies were due to come under close scrutiny. Speaking to Contractor UK, Bob Jones, an independent tax expert who previously worked as an inspector of taxes for HMRC, has said that we must look to the past when umbrella companies existed alongside composite companies to fully understand this brief.

Jones reminds us that both composite and umbrella companies allowed travel expenses for tax purposes. Composite companies, however, also had to use dividends in order to avoid the necessity for payment of employers national insurance contributions and they had to ensure they worked outside of IR35. Of course, the introduction of MSC legislation was supposed to deal with this issue but the MSC legislation did not include umbrella companies. Jones states, “I knew from my time at HMRC that there was serious concern over the travel expense effect of umbrellas”.

The fact remains that a person needs to be required to move between workplaces during a period of employment for travel expenses to be permitted for tax purposes. It is the continuity of an overarching contract through an umbrella company provides that allows someone to claim travel expense, even when working at only one specific location for each specific employer. This is only the case if the overarching contracts meet the specifications laid down by HMRC and many of them do. This, however, was not the aim of the legislation and, therefore, Jones comments that the HMRC have been faced with the difficulty of how to deal with this situation.

The granting of dispensations has, perhaps, occurred on occasions when the appropriate checks have not been made. Jones says, “…there was a time a few years ago when the staff dealing with dispensations would be unaware of exactly the nature of an umbrella company. In fact, the term ‘overarching contract’ had probably not been thought of and consequently any umbrella companies at that time would have been granted a dispensation with the minimum of effort. It follows, therefore, that there are perhaps umbrella companies out there who do not have overarching contracts and/or whose dispensations are of doubtful validity.”

Jones states that HMRC will exploit any flaws or discrepancies in day-to-day bookkeeping. He also states, “have no doubt that HMRC will scratch beneath the surface to see whether overarching contracts are applied correctly in practice.”

Brief 50/09 also refers to umbrella companies who may be flouting minimum wage legislation. £5.73 is the minimum wage but some employers may include expenses within that figure, therefore reducing the actual minimum wage and applying tax and national insurance to the net figure.

Jones comments that HMRC do not know how many umbrella companies there are, which makes it difficult to know which they should be investigating. This is the reason why HMRC have now asked workers and end users to contact them with any cause for concern.

Umbrella companies who are not operating correctly face a huge financial implication. Jones gives the example: “Say an umbrella has not been operating its dispensation correctly as a result of which there is then the tax loss of £100 per employee per year. If there are £500 employees and five years that is a quarter of a million pounds – add interest and a hefty penalty – and, well you can work it out yourselves.”

Brief 50/09 should only be of concern to those umbrella companies who have given their workers, end users or HMRC reason to believe that they are not operating as they should be.

HMRC have announced that they will be investigating a number of issues surrounding umbrella companies. They will be scrutinising umbrella companies who flout the rules as indicated in their recent brief (50/09).

The issues of concern detailed in this brief are:

• Potentially ineffective overarching employment contracts
• Dispensations which are invalid, or which have been wrongly applied
• Not complying with the terms of the dispensation
• ‘Expense payments’ made tax-free without that level of expense, or in many cases any expense, having been incurred
• Potential illegal deductions from workers’ pay
• Ineffective and sometimes unlawful management processes
• Breaches of national minimum wage

Speaking to Shout99, Bob Jones, an ex-Revenue Inspector and Shout99 expert had this to say: “Last year HMRC published a consultation document regarding umbrellas. I was convinced that HMRC were going to introduce legislation to make umbrellas, at best, a less viable alternative. In my response via Shout99 I suggested that some of the problems with umbrellas were of HMRC’s own making because of, amongst other things, a lack of staff awareness and failure to use existing powers. In the end HMRC announced their intention to use their existing powers [50/09] is the end result of that decision.”

He continued, “There are some umbrella companies without robust overarching contracts, without adequate checks that expenses have been incurred, without adequate audit trails where expenses have been incurred and using salary sacrifice to pay below the minimum wage. Those responsible umbrellas who comply with all their legal obligations simply cannot compete with those who do not. Compliant umbrellas will welcome this approach by HMRC. Non compliant umbrellas will be expected to make good all tax, NIC together with interest plus all conceivable penalties that HMRC can charge.”

The recent Stringer v HMRC ruling by the House of Lords declared that certain contractors could claim holiday pay from their clients. Certain contractors, so-called ‘permtractors’ could be claiming relatively large payouts. This news could go a long way to encouraging clients to ensure that the contractors they employ are outside of the IR35 legislation. This ball is certainly in the client’s court, especially considering the recent ruling on the Tilson case.

Accountax Consulting were one of the first to report on this case. Mark Taylor from the group said, “The Lord’s ruling means you can be self-employed yet still be a worker entitles to paid holiday. The ruling means their claims are no loner limited to the current annual leave year.”

Taylor then discussed the unlimited claims that could result from this ruling, stating, “In the past, most firms would pay off the worker, as a year’s holiday pay – the previous maximum – cost less than an Employment Tribunal defence. However, with one backdated holiday award, that in the Canada Life v Gray case, being in excess of £30,000 the financial impact on clients could be disastrous.”

Contractors will need to think very carefully about their IR35 status before they consider such a claim as HMRC will ask some tricky questions of any contractors attempting to claim holiday pay who have previously declared that they are working outside of the IR35 legislation.

Contractors working through an umbrella company are unlikely to benefit from this latest ruling as they will have a contract of employment with their umbrella company. However, they should check the holiday payments they have received from their umbrella company over the years.

Source: Contractor Calculator

The final consultation on the Agency Workers Directive (AWD) was held on this week at the Department for Business, Innovation and Skills (BIS) in London. It is now likely the directive will include umbrella company contractors, whereas contractors who provide their services through a limited company will be exempt.

There was an intense debate regarding the definition of a ‘worker’. It is now likely that the definition used in the Working Time Regulations 1998 will also apply to the agency workers covered by the Agency Workers Directive. Umbrella company contractors tend to view themselves as independent contractors but their working arrangements actually make them employees.

BIS has published the consultation document which classifies a worker as, “someone who works under a contract of employment”. It continues, “Any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer or any profession or business undertaking carried on by that individual.”

Union delegates to the consultation did not want any exclusions to the directive, claiming that vulnerable workers would be forced to use those particular working practices to stay outside the AWD. Therefore the BIS are still questioning the apparent exclusion of limited company contractors.

The BIS consultation is open for responses until the end of this month and contractors can use the BIS website to make their views known. They can also write to their MP to request a delay in the implementation of the directive. It does not need to come into force until December 2011 but many groups are calling for the directive to enter the statute books as early as April 2010.

Through data gained from the Freedom of Information Act, the Professional Contractors Group (PCG) this week announced that the controversial IR35 rule has only gained HMRC around £1.5 million per year. HMRC had expected IR35 to gain them £220m per annum in National Insurance Contributions alone. However, it seems this is not the full story.

When HMRC measures the income that is directly attributed to IR35 it will not take into account the umbrella companies which were formed as a result of IR35 and the tens of thousands of contractors employed by them. In actual fact PAYE income tax and NIC bills from the umbrella company giants are amongst the largest in the UK.

It is impossible to draw conclusions on the benefits of IR35 to the exchequer as it is unclear how the IR35 revenues have been calculated. Many contractors using an umbrella company are not doing so because their contracts are believed to be within IR35. Many newer contractors prefer not to run a limited company, instead opting for the convenience and simplicity of using an umbrella company.

The likelihood is that IR35 is here to stay as its abolition could result in a major increase in limited company registrations and offshore solutions, which would definitely not suit HMRC or the Treasury.

PCG still believes that there is more to be gained from following up with further Freedom of Information requests to HMRC. They commented, “In doing so, we will find out the true costs of IR35, and expose the wildly inaccurate premise on which it is based. PCG now has an even stronger case to make for IR35’s abolition, which politicians of all parties cannot fail to ignore.”

It is clear, however, that sweeping changes to tax legislation are unlikely to be made by the government or the opposition, especially if they will only make a small contribution to the reduction of the budget deficit or the reparation of UK PLC’s finances.