Why agencies still need umbrella companies
HMRC has made it very clear that post April 2016 it will be difficult for many contractors working through umbrella companies to claim tax relief on their travel and subsistence expenses. Some commentators have suggested that this change will spell the end of the umbrella company.
What we all have to remember though, is why umbrella companies came into existence in the first place which was not simply to allow contractors to claim tax relief.
A bit of history
Umbrella companies, in the form they now exist, became popular around 15 years ago. Contract workers needed a way to work with recruitment agencies that allowed them to provide their services and deal with the invoicing and payment requirement without the administration burden that operating through a limited company can sometimes entail.
Recruitment agencies will not normally engage with sole traders and need to be assured that their contract workers’ tax affairs are in order. This means that they normally insist on their contractor working through an entity that has limited liability – this leaves the choice of umbrella or PSC.
What are the benefits to workers?
It’s not just the entitlement to tax relief on expenses that make umbrella companies attractive. Indeed, this is only a part of the picture and this means that even when the Government’s changes are brought in, there will still be many reasons for contractors to use umbrellas:
Employment protection – all umbrella companies workers are employees in the fullest sense of the word. They are entitled to statutorypayments such as Maternity Pay and Sick Pay.
Invoicing – the umbrella company processes timesheets and invoices the agency on the workers’ behalf. They will also do the chasing of payments if required.
Pensions – umbrella companies provide access to group pensions schemes.
Financial services – as a contractor it is not always easy to access financial services such as mortgages. Umbrella companies can provide a solid employment history for mortgage lenders and many partner with contractor specialist financial advisers.
What are the benefits to agencies?
There are around 450,000 workers in the UK who are providing their services through umbrella companies and it is highly unlikely that they will all be taken on the books of agencies and clients after April 2016. This is for a number of reasons including:
Protection – umbrella companies provide agencies with the assurance that their workers’ tax affairs are in order meaning that there are no potential liabilities to be passed up the supply chain.
Employment rights – employing a large workforce comes with a lot of responsibilities which are handled by the umbrella company. There would be considerable additional costs to an agency if they were to employ their contractors.
HR – running a large workforce also comes with problems around disciplinary and grievance issues. Again the umbrella company will deal with all day-to-day issues around HR management.
Added value – happy contractors are loyal contractors so working with a partner that can add value to the relationship between worker and agency is vital in a competitive market. An umbrella company can offer extra benefits to workers such as childcare voucher schemes, loyalty discounts and cashback shopping schemes.
It’s good to talk
We are starting to hear reports of companies popping up providing “solutions” that they say will allow workers to claim tax relief on expenses in the post April 2016 world. These need to be treated with extreme caution, not least because the legislation is still under review and we do not yet know exactly how it will be enforced. Many are based on “legal opinion” or are offshore and can be simply saving up issues for the future should they be hit by the TAAR rules.
Some agencies are being asked to sign Non Disclosure Agreements in order to learn more about these schemes which we feel should ring alarm bells.
It’s now more important than ever to have open and honest discussions with your providers to ensure that compliance in the supply chain is maintained.
The future is bright for umbrella companies and we can see that close relationships will increasingly become important – please give us a call and we can arrange to meet with you to give you some expert advice and guidance.
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