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29th Mar 2024
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PBR: Are umbrella companies in or out?

by The Editor at 09:53 12/12/06 (News)
The Chancellor's announcement to force 'managed service companies' to reimburse workers via the PAYE route has sparked a further debate as it what is a 'managed service company' - specifically would it include umbrella companies?
The consultation document defines MSCs as 'composite companies' and 'managed personal service companies', both increasingly popular in the construction industry.

A composite arrangement is easier to identify - typically a small number of owners in a managed and created company with a complex eve of shareholding and ownership to allow workers to be paid in an advantageous tax way through a combination of low salary and high dividends.

The 'managed personal service companies' could be a narrow or a wide reaching net. Umbrella companies operate through a mixture of PAYE and expenses. There has been informed speculation that the way the consultation document is currently drafted they could be affected, but it would now appear that was not the Government's intention.

The law of unintended consequences
Whatever the outcome, it raises more questions than it answers. If they are included, then why not large 'body shop' organisations which pay employees and have allowable expenses? If umbrellas are not included than why can they pay PAYE and expenses when composites are not allowed to pay expenses?

The document is out for consultation until March next year and this is likely to be one of the areas which will be addressed.

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Speaking at a Charterhouse International seminar on the morning after the Pre Budget Report, leading tax expert, Anne Redston, said: "As I read it, what is now a composite and what is now an MSC and the umbrella all technically fall within the definition of an MSC. But I'm not sure that is what HMRC intended.

"If HMRC think that the umbrella gets out because everything they pay is “employment income” ie including their dispensed expenses, then why are expenses are okay for an umbrella, then why aren’t they for a composite?

"HMRC are taking comments on the legislation at the moment and will consider whether it does do what is intended, in due course."

In or out?
Others in the industry were more certain - both ways. Some leading umbrella companies put notices on their websites reassuring clients that they were unaffected by the proposed changes.

While specialist contractor account, Simon Dolan, Managing Director of SJD Accountancy, believes as the document is currently drafted some umbrella companies would also be affected.

He said: "Unscrupulous umbrella companies have also been hit by this legislation. Buried deep in the 72 page document outlining the new proposals is a paragraph which states that the ability to claim high levels of expenses through umbrella companies are to be stopped. Genuine and ethical umbrella companies are a convenient way of minimising paperwork for individual contractors, and provide a very useful mechanism for lower paid or short term contractors. In recent years however there have been several companies set up with the express intention of urging contractors to make often false expenses claims to bolster their earnings.

"Working through an umbrella company still requires each contractor to pay tax and National Insurance in the same way as ordinary employees. As a result, net earnings will typically be in the region of 60 to 65 per cent of a contract value and contractors moving from a composite company arrangement to an umbrella company will find themselves paying the full PAYE and NI amount almost immediately."

Simon reached his view by cross-referencing the Government's definition of an umbrella company with paragraph 4.1 in the consultation document. It includes a section indicating that the Government proposes to introduce legislation in Finance Bill 2007 to 'apply rules for tax relief for travel expenses to put MSC workers in the same position as other employed workers by treating each of their engagements with an end client as if it was a separate employment with the end client, carried out at a permanent workplace.

What the Treasury says
It would appear that while there could be a case for believing that the consultation document - as drafted - could cover umbrella companies, that was not the Government's intention.

A Treasury spokesman said: "Umbrella companies are not included in this. We are not looking at employees who are paying tax and NICs on salary.

"It is different with an MSC where you are avoiding NICs because you are commonly paid a low salary and high dividends."

We asked the Treasury if a different unlevel playing field could be created, in so far as under the new proposals composites could pay PAYE and no expenses, whereas umbrellas could pay PAYE plus expenses.

A Treasury spokesman said: "Quite right. It's another area that we are interested in - but not as a direct part of this consultation."

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Susie Hughes
The Editor © Hardhatter 2006

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