10th December, 2021 I’m often educated by my law trained business partner as to…
Umbrellas – ‘a little light and shade’
Umbrella is a word with an uncertain origin but perhaps comes from “umbra” meaning a shadow. So “little shadow”. Seems to fit.
The contractor world is familiar with umbrellas and whilst an exact definition will depend on where you are in the supply chain, an intermediary receiving payments and passing on money net of tax and other deductions, would cover most situations.
Unfortunately, many times in the past (and today), the “little shadow” is is fact hiding a dark and unwelcome element of tax avoidance. The shadows may also contain traps for the unwary in the form of other deductions of greater or lesser legal integrity but this piece is about tax.
More importantly it’s about tax and how the Government proposes to regulate this sector of the contractors world.
We should therefore welcome the fact that “something” has appeared (see at the end of the blog) but I really hope the forecast remains fair because the pace of creating a compliant, useful, relevant and universally accepted umbrella is achingly slow. The document below – as observed by my colleague Thomas Wallace TEP ATT is full of ideas but completely lacking in commitment.
It’s a long document and will no doubt be poured over in detail by many parties over the next few months. For me however the opening line of the document summarises the problem and the fact that without solving it, everything else in this document is a waste of print.
Note – emphasis upon “non compliance”. This clearly shows that the primary driver is HMRC seeking more money. This has been a constant theme and we see statistics from the agency which indicate the scale of the issue (in their eyes) and the “success” of the reforms (in their eyes) which are all based on alleged increased tax yield. (It must be said that many observers do not recognise the statistics HMRC use to support their view).
Even if the purpose of the consultation was to produce a better and more defined umbrella operation there remains the problem that “employment” and “employee” and “employer” mean different things for tax and employment law purposes. The opening sentence links the two but Government remains steadfast in saying that there will not be a common definition or common legal analysis. Until we do have a joint definition, achieving a position which satisfies both tax and employment law, is a pipe dream.
Part of the problem is also that this is an area that has grown organically and largely without regulation. Agencies have always been involved in contractor supply chains. It was the case that many also processed payments between the parties. The payroll process is however one in which volume is key and the development of software systems of ever increasing efficiency and the focus of agencies on more lucrative parts of the supply train, allowed space for specialist “umbrellas”. These were used by tax planners as IR35 was introduced, became a problem, was “solved”, reformed, “solved”, reformed again and even today is arguably a barrier to business.
Each reform offered tax planning opportunities and many hid under an umbrella – and continue to do so.
Very recently the issue of umbrellas being used as tax avoidance vehicles has gained a higher profile and we see the rise of audit platforms that seek to get “under the bonnet” of their operations and consider whether tax is ultimately “lost”. (Bear in mind that HMRC’s present view appears to be that tax “lost” is the responsibility of the contractor and not the umbrella.) Any reputable umbrella is usually more than happy to share their data and acquire a clean audit report.
These audit channels are valuable and have a part to play but ONLY if individual contractors insist on using those with clean audit reports to the exclusion of all others. Also remember that some umbrellas in the past were perfectly compliant at the start but became vehicles for avoidance later either under pressure to offer customers a better deal or via a change of ownership. An audit report is good but needs to be constantly updated.
A clean tax audit report is therefore a minimum. The consultation lays out some options if tax is found to be due – but not paid. This includes seeking tax from “another business in the labour supply chain”. Interesting and something bound to create worries for some. Another is that the business supplying the worker should “be the employer”.
In some ways the latter is already catered for in the agency rules in the tax statutes (see sec 44 et seq ITEPA 2005). We (WTT) have fought and continue to fight to have these rules applied to the last 20 or so years. HMRC has been unwilling to accept that these rules should apply in anything other than a very narrow set of circumstances. To see these now being proposed as an “answer” looks at best inconsistent and at worst hypocritical.
Breaking down the key issue
The key issue on all the above however is the gap between tax and employment definition. Without closing that gap and making umbrella responsible for all employer obligations, we will continue to see the prospect of unfair arbitrage between contractor and client.
This will be an interesting consultation to contribute to and be part of and we should park some of the issues above until we have seen more. We would hope that the trade bodies will support this consultation in a positive way, with regard to the benefit of contractors.
Stopping tax avoidance is impossible. For so long as there are those willing to shave a little (or a lot) from their contribution to society and those willing to provide the means – by action or inaction – we will see offerings. If those plans can hide in the shadows, it prolongs their lives.
A good gale can invert your umbrella without actually breaking it. Exposing the underside to the elements once in a while is not a bad thing. I fear however that this consultation is a a brief squall that lacks the power or intent to bring about real change and that the failure to join tax and employment law will ultimately reduce its effectiveness.
HMRC’s response to evidence on umbrellas
The link will direct you to a Government page, where you will find the document ‘Tackling non-compliance in the umbrella company market: Consultation’
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