Umbrella Company Crackdown

The recent Budget is of particular notice to UK contractors because of an umbrella company crackdown by Chancellor George Osborne.

It will call into question the whole umbrella company industry which sprang up since they brought IR35 onto the statute book in 1999.

Those contractors outside IR35 used limited companies. However, those inside IR35 now use umbrella companies.

IR35 Tax

Very few people actually paid the IR35 tax. Figures produced by the Government after a question in parliament show that the tax take from IR35 was tiny.

From memory it was only around £12m a year. That’s not worth the bother legislating for the tax in the first place.

What those contractors who IR35 caught did was to join an umbrella company.

They couldn’t make the savings, nor get the returns, they could through using a limited company that they did previously.

Travel and Subsistence Via Umbrella Companies

However, they were able to claim travel and subsistence as well as a few other expenses against tax.

This generally saved the contractor up to 5% in tax relief – which was better than just paying the IR35 tax.

The contractor is termed as an employee of the umbrella company and they pay his, or her tax for him through PAYE.

So, as they were working ‘away from their main office’ the Umbrella Company was able to claim travel & subsistence for the contractor and get tax relief on it for him or her.

Umbrella Company Crackdown on Expenses

Now, the Government wants an umbrella company crackdown on expenses. They are detailing proposals to restrict the travel and subsistence tax relief for contractors. Those working through an intermediary such as an umbrella company or a personal service company will be affected.

As the contractor pays the umbrella company a monthly fee for processing his, or her, income and obtaining them the tax relief on travel and subsistence, the Government’s umbrella company crackdown appears to obviate the need for umbrella companies in financial terms anyway.

If Contractors are to get no tax relief on travel and subsistence by using an umbrella company, many of them will be asking what they pay the monthly fee for.

No Financial Benefit by Using Umbrella Companies

Some contractors will be happy to pay the fee to get their admin done by someone else.

For other contractors the Government’s umbrella company crackdown means that there is now no financial benefit in using an umbrella company.

They will be looking for other methods of processing their income which will be of greater financial benefits.

They will be looking at:-

Limited Companies

While limited companies are also affected by the Government crackdown on tax relief for travel and subsistence, there are still many other expenses that a contractor can claim.