Consultation launched on ‘umbrella’ companies
The government has launched a consultation over so-called umbrella schemes: overarching contracts of employment (OACs) where an intermediary company provides temporary employees to work at a number of different companies.
Such arrangements are widely used by agencies providing truck drivers to transport operators.
There is increasing concern that advantage is being taken of these schemes to avoid the payment of income tax and national insurance, and reduce actual salaries to below the minimum wage. Low wages are sometimes paid to minimise tax and national insurance payments, while salaries are ‘made up’ by maximising non-taxable expenses for subsistence and travel.
Unlike regular employees, workers in an umbrella scheme can offset expenses for traveling to and from their place of work and subsistence for meals against income tax.
Employees typically pay the umbrella company fees for making these arrangements, and processing their payroll and expenses claims. These fees are usually the only income the umbrella company receives.
Since 2011, the government has amended the national minimum wage (NMW) rules to prevent travel expenses being counted as income, and has announced new rules to tackle the use of off-shore intermediaries to avoid employment taxes and facilitate false self-employment.
Government expects these reforms to raise £600 million tax revenue this year, and a further £1.5 billion in the next three years. But, it says: “Most recently, there has been an increase in the use of overarching contracts by umbrella companies and employment agencies who seek to use such contracts to exploit the tax rules for travel and subsistence for temporary workers. This is estimated to be costing the exchequer at least £400 million a year.”
Launching the consultation, the Department for Business, Innovation and Skills (BIS) acknowledged that working under an umbrella or OAC could result in a legitimate reduction in the burden of administration for people who would otherwise have to be self-employed and those who use their services.
BIS said the consultation would aid it in presenting a range of options to ministers this year that will: “Address the concerns of individuals and employers, ensure the right balance of transparency and fairness, and ensure that future policy decisions are based on more robust data, and avoid unintended consequences.
It said: “This will result in an employment status framework in the UK that is fair and flexible meets the needs of everyone involved.”
The Government is also concerned that OACs are still being used as a means of avoiding paying the NMW under: “a contract which purports to be an OAC for the purposes of income tax and national insurance contributions (NICs), but not an employment contract for employment rights purposes including the NMW.
“The promoters and users of this model incorrectly believe that this entitles the individual to tax and NICs relief on travel and subsistence expenses which they aim to exploit without granting the individual any employment rights or entitlement to the NMW. However, a worker’s entitlement to NMW is based on the reality of the working relationship and not what has been drafted in the contract.
“A second, similar model involves setting up the individual as a director of an incorporated entity – or in more colloquial terms a personal service company, which is then essentially managed by the umbrella company. This again aims to maintain the individual’s entitlement to tax and NICs relief for expenses while appearing to prevent them from being a ‘worker’ for the purposes of NMW regulations. Again, an employment tribunal will look at the reality of the working relationship and it is possible that NMW is payable.”
The consultation seeks help in defining OACs, describing how and why they are used and invites further comments on their use. It can be viewed here.
