‘Great care’ needed over umbrella arrangements and temporary workers

Some welcome changes to the taxation of employee expenses and benefits are included in the draft Finance Bill, following a review by the Office of Tax Simplification, but a more difficult issue concerning the use of umbrella companies and “salary sacrifice” was addressed in a separate consultation published on 16 December.

The government noted an increase in “the use of overarching contracts [OACs] by umbrella companies and employment agencies who seek to use such contracts to exploit the tax rules for travel and subsistence for temporary workers”.

HMRC said: “Whilst individuals engaged under an OAC by an umbrella company may be in a position to pay less tax than an identical worker engaged under traditional employment business arrangements, any financial benefit to the individual can often be offset by the administrative fees charged to them by their umbrella company. This can mean there is only marginal, or even negative financial benefit to the individual to being engaged under an OAC instead of under a traditional employment business arrangement.”

Yesterday the Chartered Institute of Taxation’s Low Incomes Tax Reform Group said in its response to the consultation that “great care” should be taken to ensure that there are no unintended consequences of a change in the legislation. Pursuing a worker rather than the employer for unpaid tax could lead to a contention that the worker has over-claimed tax credits, for example. The group suggested that workers unwittingly caught up in a “non-compliant” scheme should not be pursued for tax arrears for years prior to the proposed change.

I discuss these reforms in my latest article for Tolley’s Company Secretary’s Review.