Autumn Statement: what next for umbrella companies?

We reported on 20/6/14 regarding likely new measures affecting umbrella companies (see our subscriber newsletter: “Potential significant changes on the horizon for umbrella companies”). Sure enough in the Autumn Statement the Chancellor announced two measures which could have an impact on the sector.

Whilst there has already been a lot of speculation about the target of the measures announced – what form they will take, and why they are being introduced – this update focuses on the facts and not the hyperbole.

The announcements

There were two announcements in the Autumn Statement documents of direct significance to umbrella companies:

1.251 As part of its reform of the rules for employee benefits and expenses in response to recommendations by the Office of Tax Simplification, the government will stop tax relief from being claimed on reimbursed business expenses when they are paid in conjunction with a salary sacrifice scheme. The government is also concerned at the growing use of overarching contracts of employment by employment intermediaries such as ‘umbrella companies’, which allow some temporary workers to benefit from tax relief for home-to-work travel expenses that is not generally available to other workers. The government will review these arrangements and publish a discussion document inviting representations from interested parties to inform potential future action.

2.147 Overarching contracts of employment and temporary workers – The government will review the increasing use of overarching contracts of employment by employment intermediaries such as ‘umbrella companies’. These arrangements enable workers to obtain tax relief for home to work travel that would not ordinarily be available. The government will publish a discussion paper shortly to inform possible action at Budget 2015.

The reference to the recommendations of the Office of Tax Simplification (“OTS”) in the first sentence of the first announcement above is to an existing consultation.

4.13 The Government is aware of a number of arrangements that are used by a minority of employers which seek to replace taxable pay with payments of non-taxable expenses. Historically these arrangements have involved employees sacrificing an amount of their salary in exchange for being paid an equivalent amount of subsistence expenses. The primary purpose of these arrangements is usually to reduce the amount of NICs that the employer is required to pay. The arrangements are often aimed at low paid employees.

There is still no detail as to what form this measure may take, although there is an indication that it may be achieved through a so-called Targeted Anti-Abuse Rule (“TAAR”):

4.18 The proposed exemption provides an opportunity for the Government to tackle some of these arrangements and prevent them being used in the future. This would most likely be achieved through a targeted anti-abuse rule to prevent such arrangements being used in conjunction with the exemption.

Although they can take many forms, a TAAR often involves looking at the purpose or motive of arrangements. Contrived tax-motivated arrangements are caught, whereas genuine commercial arrangements are left untouched. This is echoed by the government’s announcement that:

4.19 The Government’s intention is that any action to tackle these arrangements should not disturb any legitimate business practices that are not tax or NICs motivated. While the Government is not aware of any commercial reason for these arrangements, other than a desire to reduce tax and NICs liabilities, it would welcome views on whether there are any business practices that would be inadvertently affected.

One problem is that TAARs often seem widely drawn and vague in application, leaving scope for either unintended victims or arguments and loopholes which need to be plugged – or at least years of litigation and appeals until case law defines the true extent of their application.

If this part of the announcement is specifically aimed at what are truly salary sacrifice arrangements (i.e. the specific situation where an employee gives up a pre-existing legal entitlement to salary) then they will not affect the majority of umbrella companies, as most (but by no means all) do not operate this form of arrangement.

It will also be interesting to see exactly where the battle lines are drawn. The government must be aware of entirely conventional tax/NIC-motivated salary sacrifice arrangements involving, e.g. childcare vouchers. Although the Autumn Statement announcement loosely refers to ‘business expenses’ the draftsman will need to be careful if these commonplace arrangements are not to be affected (assuming that is the intention). Again, until the precise detail of this is known and draft legislation is released, it is anybody’s guess how good or bad a job will be done.

The second part of the announcement refers to a potential new measure. It has been widely reported as an attack on umbrella companies; however the reference is actually to the perceived abuse of overarching contracts by employment intermediaries – umbrella companies are only provided as one example.

Let us not forget that ‘employment intermediaries’ as defined in the recently introduced onshore employment intermediaries legislation includes agencies, umbrella companies and personal service companies (“PSCs”) alike. See also the comments below regarding the financial forecasts.

That said, the announcement only refers to a future review, a discussion paper and ‘potential future action’. At face value, nothing is set in stone here. The previous government review of umbrella companies a few years ago resulted in a promise of increased compliance checks but no new legislation.

Once again, until specific details are released any speculation as to the extent, application or ramifications of such a review is simply unhelpful noise.

When will this happen?

It has previously been suggested that the new salary sacrifice legislation would be with us in April 2016. However paragraph 2.147 of the statement suggests possible action at Budget 2015 in relation to overarching contracts.

Buried away at the end of the budget documentation are the Chancellor’s numbers. These indicate what the Treasury expects to rake in over the next few years from the measures announced.

In relation to the above announcements (at section 42) these are stated to be:

Income tax: salary sacrifice and expenses, including umbrella companies

2014/15              £0

2015/16              £0

2016/17              £120,000,000

2017/18              £90,000,000

2018/19              £75,000,000

2019/20              £75,000,000

(Note that the heading includes ‘umbrella companies’. This lends weight to the argument that the measure will be focussed on umbrella companies rather than overarching contracts).

With the important caveat that we don’t know how much faith to put in the numbers (far be it for us to suggest that they are simply made up), let alone the headings, there are two possible interpretations of these figures insofar as they relate to the ‘overarching contracts/umbrella company’ part of the announcement.

The first possible analysis is that the government already has in mind that it will introduce new legislation but that it will not be put in place until 6 April 2016, therefore no ‘yield’ has been allocated to the year 2015/2016.

The other interpretation is that we can accept at face value the statement that the government truly does not know whether any new measure will be introduced at all, and the above figures reflect only the increased tax from the new salary sacrifice legislation to be introduced in April 2016. If this were correct it is hard to see why the heading would read “…including umbrella companies”.

Conclusion

Many commentators are clamouring to interpret these announcements according to their own agenda. As stated above it is important to ignore the noise and focus on the facts – even though they are thin on the ground at the moment.

One point that these measures do confirm is the current legitimacy and validity of compliant umbrella company arrangements – any requirement to change legislation to outlaw any practice by definition means that the previous legislation did not preclude that practice. It remains to be seen whether the government’s review will accept the validity of umbrella company arrangements and the service that they offer.

On this very point the Low Incomes Tax Reform Group has recently published a well-written and very balanced analysis of how the low paid claim their travel expenses, reviewing umbrella company arrangements and in particular payday-by-payday tax relief models.  As well as looking at the general service that umbrella companies provide to agencies and workers, it also busts some of the HMRC myths about access to state benefits – as well as looking at some of the problems and compliance issues.

Clearly there is at least a possibility that new legislation will be introduced and clients, agencies and umbrella companies will need the best possible advice to ensure that they are compliant and not exposed to risk of liabilities. It goes without saying that Chartergates will be proactive in providing our clients with clear, commercial and robust advice, whatever emerges from these announcements.