UMBRELLA or personal service companies, which offer tax, National Insurance, payroll and other services to freelance and contract workers, have grown rapidly in recent years as more and more people either work for themselves or on a more flexible basis for others. However, changes are on the way which will affect how these companies operate and how their users interact with them. In our monthly legal update Flora Mewies of Ward Hadaway explains these changes and their impact.
The current position
At present, anyone employed through a personal service company (PSC) or an umbrella company is entitled to tax relief and a disregard on National Insurance Contributions (NICs) on travel and subsistence expenses. This applies to assignments of less than 24 months at ‘temporary workplaces’.
This means that in many cases, so long as they are wholly and exclusively business related, and ‘reasonable’, contractors can often offset costs incurred commuting to and from clients’ premises. If the premises are a long distance from home, relief can be claimed on expenses incurred on accommodation and food.
The proposed changes
As part of the proposed amendments to the Income Tax (Earnings and Pensions) Act 2003, due to come into force on 6 April 2016, any worker employed through an umbrella company or a limited company director working inside IR35 can no longer claim for travel and subsistence costs as expenses and incur tax relief on these costs.
These restrictions will only be in place for workers who are under the supervision, direction or control of their end-client, or are essentially working inside IR35.
Contractors working outside of IR35 will not be affected by the proposed changes and will, in line with their genuinely self-employed status, be able to claim relief for their travel and subsistence as before. However, limited company directors, who are already deemed ‘caught’ by IR35, will not be able to claim tax relief on their expenses in the same way as they have previously done.
Why the change?
The Government claims that as the right to tax relief on the general commute to/from work is not available to most temporary/permanent workers, there is no justification for the benefit to be available to contractors employed through an intermediary.
The Government estimates that the changes will see an increase of up to £400 million of tax revenue over the next five years.
How will it affect contractors/umbrella companies/agencies?
There are an estimated 430,000 people in the UK currently employed by umbrella companies or employment agencies annually with men making up a disproportionately higher number of umbrella company workers than women.
While the Government has claimed the overall economic effect of these measures will be low, it acknowledges that the use of umbrella companies may decrease, with the use of other types of employment intermediary potentially increasing.
Practical concerns include:
- contractors being unwilling to take up contracts a long way from their home;
- contractors seeking to raise their basic rates to compensate for their losses;
- independent professionals being at a competitive disadvantage – e.g. large consultancies will still be able to claim the expenses, but those working for their own company will not;
- clients losing valuable resources from independent contractors, particularly if they are based in a remote location;
- clients and contractors querying contractual documentation, particularly around the supervision, direction and control provisions and querying how this information is passed to the employment intermediary.
What should you do?
It is recommended that intermediaries take steps to review their current contracts and supply models in order to anticipate the effect that this legislation will have post-April 2016. Expenses policies should also be reviewed and updated and guidance issued to those checking and authorising contractors’ claims.
It is likely that the impact will be most keenly felt by umbrella companies, and is likely to directly affect the take-home pay of workers.
Ward Hadaway is one of the UK’s Top 100 law firms with offices in Leeds, Manchester and Newcastle. We are a Northern law firm for national business. Led by experienced experts, our specialist recruitment services team offers commercially-focused legal advice on the whole range of issues encountered by businesses operating in the sector across the UK and overseas, from HR and employment to regulatory and corporate matters.
