Following the tax crackdowns unveiled by the government which target contractors, self-employed people, temporary workers, freelancers and personal service companies (PSCs), speculation has been rife that this spells the end of umbrella companies.
While some umbrella company models may no longer be sustainable, the reality is that the umbrella company model still has many benefits for most self-employed people. A quality umbrella company, or Employment Business, provides a wealth of support for contractors and these will continue to outweigh the impact of Government changes.
Both recruitment agencies and contractors are rightly concerned about restrictions to travel and subsistence claims, continuing confusion over IR35, the increase in dividend tax, the loss of salary sacrifice and the fact that the Employment NIC Allowance is no longer allowed.
However, by working with a quality Employment Business, all of these changes can be managed and the potential impact offset with a range of support measures.
What changes will affect contractors?
The big change that takes effect on April 6 2016 is new restrictions on travel and subsistence claims. Anyone working through an intermediary such as an umbrella company or who is under the “supervision, direction or control (SDC)” of an employer will no longer be able to claim tax relief for expenses incurred getting to the place of work and staying over while at the site.
We’re still awaiting full confirmation on the details of SDC but, put simply, if you arrive on site and someone tells you what to do – rather than you providing the advice and guidance to your client – you will fall foul of SDC rules.
Under the rules, public sector organisations or recruitment agencies that provide the public sector with freelance workers could be responsible in ensuring that workers pay the correct tax from 2017. These people are described as “off-payroll working in the public sector” and include those people working for Government departments, local government, NHS, schools, BBC and publically owned companies.
The IR35 intermediaries legislation is still currently under review by the Government and I fear heralds a move to make the private sector take on the same responsibilities in the months to come. This move is fuelled by a suspicion in the HMRC that only 10 per cent of PSCs of those that should be declaring themselves caught by IR35 are currently doing so.
What will be the impact of these rules?
More than 4,000 contractors are represented by the Danbro Employment Business. Across industry, an average of 40 per cent of contractors do not claim expenses. However, of those who do, they could initially see less money in their pocket.
While they do have access to a range of unique benefits, more details below, this could prevent them from wanting to travel for work. This attack on margins could have a serious consequence for our industries. We have a dire skills shortage in a vast number of sectors and self-employed people have long been the lifeline our businesses need.
The self-employment and contractor sector is predicted to continue growing for several years due to these opportunities and these restrictions could prevent many businesses from accessing the freelance skills they need.
The Chancellor argues that the businesses will make up the lost expenses by increasing pay rates but that is wholly dependent on market forces and that may take time to adjust.
What does the future hold for self-employed people?
My belief is that HMRC’s ultimate goal is to bring the tax benefits enjoyed by self-employed people and PSCs in line with those of employed people. This is grossly unfair as the current tax benefits offset the risks and challenges of self-employed life and Danbro will continue to campaign hard for this important sector of the UK economy.
In the last budget, HMRC said they had also reviewed travel and subsistence claims for all companies. However, they found the rules are being adhered to and there won’t be any changes yet. Elsewhere, BIS is looking closely at clarifying the definition of employed versus self-employed and the OTS is also looking at merging or simplifying tax and National Insurance.
In the coming months we will also see the arrival of the Apprenticeship Levy on companies, the digital tax roll-out which will herald the arrival of quarterly tax returns from 2018 and we should also finally learn the outcome of the IR35 review within the next year.
While all of this could herald positive and negative news for self-employed people in equal measure, there will be a desperate need for expert advice from trusted advisors who interpret these new regulations in the spirit in which they are intended.
The future is bright for employment businesses and umbrella companies
While the arrival of the latest regulations and the shadow of proposed future changes loom large, the need for a quality Employment Business has never been greater.
We’ve worked tirelessly in recent weeks to educate recruitment agencies and develop the resources contractors need to prepare for the changes. We’ve also bolstered the services we offer to help offset the impact of any of the new regulations.
Quality provision is key. Contractors and agencies need partners they can trust and rely on to help them make the right decisions.
By finding the right partner you can save time and reduce costs by relying on them to manage all backroom business functions, you can draw on their expertise and insights and trust that you will not fall foul of any of the new changes.
At Danbro we deliver a wealth of technology to make the process as efficient as possible and we work hard to make sure we support every aspect of the contractor’s life with services like pension schemes, cover for illness, accidents and medical procedures, systems for maintaining income when you’re out of work and a rewards scheme that delivers an average of £1,600 a year in savings across all aspects of your life.
The self-employment landscape is shifting again and self-employed people and agencies need to avoid putting themselves at risk by drawing on the expertise of a partner they can trust.
Despite the fears, quality umbrella companies and employment businesses still offer a wealth of benefits and the support that self-employed people need to thrive and prosper. The umbrella company is not dead and is coming back even stronger.