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Umbrella companies post April

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    Umbrella companies post April

    It seems as though many contractors are still in the dark about what's happening in the industry post April so I thought I'd try to add some clarity. I say try as we won't have the final guidance until the middle of next month and guidance from HMRC is somewhat lacking.

    HMG/HMRC have decided that the rules surrounding travel and subsistence expenses are to be over-turned; until now, if you were travelling to a temporary workplace https://www.gov.uk/hmrc-internal-man...anual/eim32075 you were entitled to claim tax relief on the costs you incurred travelling to a temporary location. Umbrella companies were 'encouraged' by HMRC to afford workers Statutory employment rights by engaging them under an over-arching Contract of Employment which had the effect of bringing a series of temporary engagements under a single continuous employment. This meant that umbrella company workers met the conditions required under the temporary workplace rules and could claim tax relief on T&S expenses.

    As time went on, many employers realised that they could save money but engaging contractors or even by putting their existing workforce through an umbrella company; the flexible workforce was growing quickly and were making a 'massive contribution to our economy' David Cameron praises the 'courage' of freelancers | BusinessZone. Unfortunately HMRC/HMG are not particularly forward thinking and didn't realise that the restrictive employment laws and increased employment costs that they themselves introduced would result in such a massive growth in the temporary workforce. Although they have no real idea how many contractors there are in the UK [the ONS only quotes figures 'for self-employed' workers] they decided that there were now too many people claiming tax relief on T&S and they should do something about it. At the beginning of last year we were told that restricting the relief would bring in £400 million (Loophole that lets freelance workers offset the cost of lunch and commute against tax to be closed in Budget | This is Money), it was then £265 million (Shout99 : Tax grab threatens contractors and temp workers and then it was £155 million (Umbrella Company News - All Umbrella Companies Are Equal). £155 million is about 3 day's contributions to the EU but it is, apparently, enough to warrant significant changes to legislation.

    Ok, that's the history over and done with (and a tiny rant ). In order to combat this perceived problem HMG/HMRC decided to take one of the tests that is used in employment law to determine status and apply it to tax law with the result that, if you work through an intermediary and are under the supervision, direction or control of the end client (or the client has the right to supervise, direct or control you) you will not be entitled to tax relief on travel and subsistence expenses from 6th April 2016. The legislation presupposes that, if you work through an intermediary, you will fall under the supervision, direction or control of the end client and it will be up to you to prove that you don't. Unfortunately, despite asking many times, HMRC have not told us what they will accept as proof although they have said that and tax debt that arises from claiming tax relief when you shouldn't could be passed to the agencies/end clients if they are shown to have provided 'fraudulent' documents. If you have your own Limited Company, the new legislation will apply if your working practices put you inside IR35 (IR35 Legislation - Advice, Help and Information for UK Contractors) but not if you are outside IR35.

    Even if you could prove that you were not under supervision, direction or control and you work through an umbrella company, the only way you would be able to claim tax relief on your travel and subsistence expenses would be through self-assessment at the end of the financial year as umbrella companies operate, what HMRC consider to be, a salary sacrifice arrangement which, from April 2016, prevents them from allowing tax relief at source.

    So, if you claim very few expenses or none at all then post April 2016 you will notice little change if you work through an umbrella company. If you incur high travel and subsistence costs then look at setting up a Limited Company but make sure you have a thorough understanding of IR35 as being found inside by HMRC if you've been working outside will be a double whammy post April and you will be hit for employment taxes and incorrectly claimed tax relief plus usual interest/penalties.

    There are a number of companies marketing various 'schemes' that will get around the legislation or are offering what are, effectively, MSC's [http://www.contractoruk.com/managed_...e_companies/]; whilst it appears on the surface that the MSC legislation will not be contravened, there have been questions raised about the application of the VAT flat rate scheme across a group of companies which all have a common connection. The flat rate VAT scheme is being used as a marketing tool by the providers of this type of scheme but it is likely that HMRC will be looking at it, if it fails, then recruiters could end up holding the baby (so to speak).

    Some umbrella companies that have accountancy arms are trying to move contractors en masse from umbrella to Ltd but without consideration of their IR35 status or the fact that this sort of mass migration will paint a big target on their contractors' back as far as HMRC are concerned - RTI and the agency reporting requirements allow them to do much more joined up thinking than we're used to you.

    That's it, in a not so small nutshell
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