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.