False promises may put umbrella companies at risk

Providers of Umbrella companies that imply they can secure higher than normal expense dispensations, or who pay little credence to existing tax rules are not only misleading contractors, but may provoke the Treasury into introducing yet more restrictive legislation.

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This is the view of Barry Roback, Chief Executive of JSA, UK's No.1 Chartered Accountants for contractors. JSA, along with several other leading solution providers, are now involved in a round of meetings with the Treasury which are intended to help officials to understand better the contractor market and to ensure that if yet further legislation is to be introduced, it will not harm the compliant and ëbona fideí side of the industry.

HMRC put a warning shot across the bows of Umbrella companies earlier this year when it said it was going to clamp down on expense dispensations where it felt there was evidence of misrepresentation or negligence.

HMRC can grant a 'notice of dispensation' where it is satisfied that there is no liability to income tax or NICs for certain expenses paid or benefits given to employees in the course of their employment. This means that employers and employees do not need to report the expenses and benefits included in the dispensation on their year-end tax returns. Typically, such dispensations also include certain ëround sumí amounts for unreceipted expenses.

Normally, a dispensation continues to apply until the qualifying conditions are no longer satisfied. If however it was found that a dispensation has been obtained based on irrelevant information or operated incorrectly, past HMRC practice was to revoke the dispensation and operate normal expense rules from that time forward. Only in exceptional circumstances would HMRC consider revoking a dispensation retrospectively.

HMRC says that it has discovered a small number of employers who have taken advantage of this approach and have gone on to abuse the basis on which a dispensation was applied for and/or operated. Now, according to latest guidelines, HMRC will become more active in revoking dispensations retrospectively.

The Treasury further emphasised its determination to weed out Umbrella malpractice in one of its notes that accompanied the 2008 Budget. It warned that it was concerned at the growing use of Umbrella companies or overarching contracts of employment with agencies in order to obtain tax relief for travel expenses that would not be available to other workers, and said it would monitor the use of these structures and if necessary, consider action in the future.

Roback maintains that because the government has repeatedly voiced its recognition of the importance of UKís ëflexibleí workforce, it is clearly determined not to make the same mistakes as in the past where legislative collateral damage undermined the compliant side of the industry. ìIt would appear that while everyone agrees that better and more aggressive policing of existing regulations is required, it would be very difficult and certainly undesirable to eliminate the use of compliant Umbrella companies.î

According to Roback, there are still numerous promoters of umbrella companies that are implying that they can obtain dispensations on expenses that are higher than other operators - but these claims are unsustainable. ìIt is quite wrong,î he maintains, ì to sell a service based on obtaining high expense allowances. Any respectable Service Provider will ensure that contractors claim only permissible expenses, which generally speaking, should be available to all qualifying contractors and which should form only a part of the normal service offered.î

Barry Roback concludes that there is a risk that more legislation may be introduced to root out those service providers that continue to skate on thin ice. ìUnfortunately it is all too easy for contractors to be seduced into what appears to be a good deal, with better than average take-home pay. Following the introduction of the poorly crafted IR35 and managed services legislation, it is not difficult to see that an attempt to bring such Umbrella companies into line, might end up creating more problems than it solves. In other words, the law of unintended consequences that has plagued this industry for several years, may yet prevail again. However I am hopeful that our talks with The Treasury will ensure a better outcome than in the past.î