Changes to UK legislation around expenses and proving employment status is set to alter the way umbrella companies and contractors work together from April 2016.

In a nutshell, Umbrella companies support contracted workers by taking care of all the administration that comes with payroll, PAYE and taxes, invoicing and getting clients to pay; even insurance cover for contractors in the work place. An umbrella company takes care of all this and removes the stress that comes with it. This is so that the contractor can concentrate on what they do best which is their day job. Perhaps more importantly, contractors who work with umbrella companies are able to take advantage of tax deduction/ efficiencies around expenses. This ultimately means more money in their bank account. However, this is where the new legislation to be announced in April 2016 is likely to hit contractors and umbrella companies in the pocket.

How will it affect umbrella companies?

Umbrella Companies have provided contractors a contract of service, and all of the back office administration including: invoicing, PAYE and NI deductions, collection of monies from recruiters and hirers for their services; and providing insurances for contractors in connection with their trade or occupation. This allows the contractors to concentrate on what they do best, which is their day job. One of the major advantages for the contractor using this model of employment, was the dispensation umbrella companies were allowed by HMRC. This dispensation included tax relief on travel expenses and subsistence, which helps reduced the individuals tax bill and put more money into the contractor’s bank account. From April 2016, the dispensation will be removed where the contractor is under the Direction, Supervision or Control of the hirer. Equally, this includes areas where the hirer has the right to Direct, Supervise or Control the contractor.

It’s not all doom and gloom, the changes could mark a turning point for umbrella companies who add value in many other areas but are often not given the credit they are due. Covering customers against potential tax investigations for if they do their accounts incorrectly, providing insurance cover where employers require it and offering general expertise and efficiencies on everything an HR department would usually do, are all in one place under one roof for one monthly or weekly cost.

It is not the end of the road for umbrella companies, as many contractors will still value the services offered including the legal support; invoicing, payroll, tax deductions and the insurance cover provided by the umbrella company for the workers activities. However, umbrella companies will be looking to improve their range of products and services to contractors and recruiters in the early part of 2016, ahead of the new tax year.

How do the changes affect contractors?

On the other hand, with the monthly cost for contractors to use an umbrella company starting from approximately £70 per month, some might argue, is it still worth the money? Others may feel the latest changes are enough to make them want to turn to permanent work; or set up their own Limited Company, where the contractor is earning a sufficiently high hourly rate. With many sectors relying on the flexibility and perks of contract positions and with only a short term need, going permanent might not be an option if the vacancies aren’t there. Why not just do it yourself? Well, if you are working long hours during the week you might not have time, it’s also the know-how and industry knowledge which all comes as part of the package. The other big thing HMRC will be concentrating on is whether a contractor is genuinely self-employed or not. No contractor wants to be investigated because they are not being deemed as self-employed and then to be hit with a substantial tax bill or lawsuit.

Below is an outline of the key criteria set out by the UK Government, which must be satisfied before the provisions of the agency legislation can apply and you are deemed as self-employed. All three of these have to exist before expenses are excluded and only one needs to exist to prove a person is not self-employed.

Supervision, Direction or Control (SDC)¹

Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do and it is being done correctly to the required standard. Supervision can also involve helping the person where appropriate in order to develop their skills and knowledge.

Direction is someone making a person do his/her work in a certain way by providing them with instructions, guidance or advice as to how the work must be done. Someone providing direction will often coordinate how the work is done, as it is being undertaken.

Control is someone dictating what work a person does and how they go about doing that work. Control also includes someone having the power to move the person from one job to another.

Our advice at Jelf is for contractors to be aware of the changes, ask the right questions and consult your umbrella company. Umbrella companies may themselves also look to take on tax investigation cover during this time as the new legislation throws up uncertainty around new rules and regulations.

¹ Gov.uk – Definition of Supervision, Direction or Control with supporting examples

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