Umbrella Company Contractors Options
Now that the Chancellor has ruled that umbrella company contractors options can no longer include offsetting travel and subsistence expenses against tax, will they jump ship, en masse, and use personal service companies now?
Umbrella Companies have been disappointed that this has hit them but not those using personal service companies.
However, it could have been much worse for umbrella companies.
There had been rumours that the Chancellor was going to abolish intermediaries altogether.
He saw intermediaries as umbrella companies and personal service companies.
According to the leaks contractors were going to be on their client’s payroll once they had bene there for a month.
This rumour was changed to being only those contractors who are caught by IR35.
When it came to the Autumn Statement, and the 2016 Finance Bill, there was nothing in it at all about it and umbrella companies were most relieved.
That was an existential threat whereas this may cost them some contractors?
Mass Exodus from Umbrella Companies into PSCs?
Will there now be a mass exodus from umbrella companies into personal service companies?
Will umbrella companies lose all their contractors?
There was already a massive difference in he amount of tax and national insurance contributions paid by personal service company contractors and umbrella company contractors.
£10,000 to £15,000 a Year Difference in Tax
It’s reckoned that there would be a difference of around £10,000 a year for an IT Contractor making the average daily rate of £425 a day.
With limited company contractors still able to claim for travel and subsistence, this could rise to as much as £15,000 a year.
So, surely most of them will jump ship now?
After all, the expenses that they are able to save against tax may well be less than the amount that they now have to pay the umbrella in fees each month basically just to pay them.
Most Don’t Claim Expenses
However, it seems that perhaps the majority of umbrella company contractors don’t even claim any expenses against tax in the first place.
According to giant, around 60% of their contractors don’t claim any expenses at all.
I’d seen figures of more than 50% elsewhere.
Most contractors don’t follow contractor websites.
Those that don’t and who are in umbrella companies and who don’t claim expenses will, therefore, not notice any difference.
They won’t even know what happened.
Staying With Umbrella Company
So, the vast majority of them will continue with their umbrella companies.
You could say that 50% to 60% of contractors are ‘in the bag’ for umbrella companies.
That would leave, 40% to 50% of umbrella company contractors who have been claiming expenses.
This is the vulnerable group for the brollies.
Giant reckon that “most of these are professional contractors who will be able to demonstrate that there is no supervision, direction or control over them and therefore continue to claim travel and subsistence”.
Danger They Might Join Personal Service Companies
There is a danger here, though, for giant and other umbrella companies. If those contractors can prove that they are not supervised, controlled and directed by their client company, then they may well be outside IR35.
Supervision, Direction and Control is one of the three major IR35 factors that point to being inside IR35.
If those contractors can prove they are outside that, some of them may decide to go the whole hog and save another ten grand a year by using a personal service company instead.
That is the danger for umbrella companies.
No Existential Threat in 2016
It doesn’t look now, though, as if here is no existential threat to umbrella companies 2016.
Any further changes would be unlikely to take effect till April 2017 now.
So, how many of those 40% to 50% of umbrella company contractors who currently do claim expenses, will go?
Probably not that many will leave.
If they are not now able to claim travel and subsistence expenses against tax because they fail under the supervision, direction and control test, they are almost certainly caught by IR35 and have nowhere else to go anyway.
They cannot operate through personal service companies if that is the case.
Claiming Travel and Subsistence
So, what about those who can still claim travel and subsistence expenses against tax?
Surely, nothing changes for them.
They may well have been outside IR35 before but still chose to use an umbrella company.
Some of those did that because they did not want to take the chance of an IR35 investigation.
Others did that because they didn’t want the admin of running their own company.
So, surely not much will have changed for them.
Keeping Their Contractors
So. it looks as if umbrella companies will keep virtually all of those who didn’t claim expenses.
It will surely keep all of those who are caught by SDC and almost certainly IR35.
It will also keep most of those who can still claim expenses as they are not under SD and C.
The only ones that they might lose are those who might become more aware of the possibility of their being outside IR35 because they have had to pass the SDC test to continue to get their expenses.
Umbrella Company Contractors Options are not limited.
However, it looks as if probably 95% or more of umbrella company contractors will remain with their umbrella companies.
It may be a little harder when it comes to getting new contractors into the umbrella companies but this is a nuisance to umbrella companies rather than being an existential threat.
They will survive!