The foul play and abuse of Travel and Subsistence claims by some umbrella companies could damage the reputation of your recruitment agency if you refer your contractors to them. With the government likely to crack down on the abuse of Travel and Subsistence claims, it’s time to check you aren’t at risk!
In our previous post, we discussed Chancellor George Osborne’s announcements to review Travel & Subsistence claims for umbrella company contractors and to potentially halt them altogether. There is no doubt that should these changes come to fruition, contractors operating through umbrella companies will suffer a substantial financial reduction in their take home pay.
Recruitment agencies are also at risk, as the foul play of some umbrella companies could negatively affect them, but what are the proposed changes, and how exactly will this consultation affect you and your contractor?
What is a Travel and Subsistence claim?
Travel and Subsistence includes expenses such as transport, mileage and food in addition to other work-related expenses. At present, contractors operating via umbrella companies are able to claim these expenses and receive considerable tax relief as they can claim these expenses against their taxable income. This means that they are only taxed on their income less the cost of expenses, allowing them to maximise their take home pay.
Why are the rules changing?
Whilst the changes are not yet confirmed, it does seem very likely that come April 2016, the Government will announce the end of Travel and Subsistence claims for all contractors except those operating via a limited company outside IR35.
The Chancellor wants to end this method of tax relief, as it has been discovered that many contractors are claiming more than they are due, at a cost of £265 million to tax payers. In many cases, contractors are claiming travel expenses for journeys from home to work, which permanent workers are unable to claim. The Government is essentially trying to create a ‘level playing field’ where permanent workers and contractors are more tax-equal.
Additionally, many are deemed to be making false expense claims for journeys that never occurred, and some umbrella companies – who know exactly what the tax laws are – are helping contractors avoid taxes to their benefit. It is acts such as these that make the credibility of umbrella companies questionable, and contractors who do follow the rules will suffer the consequences.
What does this mean for your umbrella contractors?
If the review results in an abolishment of Travel and Subsistence claims from April 2016, most contractors operating via an umbrella company will find they have a reduced take home pay. This will see umbrella company contractors employed via an umbrella company reduce their take home pay reduce from 73% to 66% for those operating via an umbrella company.
The following umbrella company calculations demonstrate the monetary impact of the looming change on contractors’ take home pay from financial year 2015/16 to 2016/17:
| Umbrella Company – 2015/16 (with expenses) – based on a monthly calculation | Umbrella Company – 2016/17 (without expenses) – based on a monthly calculation | ||||
|---|---|---|---|---|---|
| Monthly Rate | £ 4,000.00 | Monthly Rate | £ 4,000.00 | ||
| CKA Instalment | £120.00 | CKA Instalment | £120.00 | ||
| Expenses | £200.00 | Expenses | £ 0.00 | ||
| Total Deductions | £320.00 | Total Deductions | £120.00 | ||
| Balance | £3,680.00 | Balance | £3,880.00 | ||
| Employer’s NI | £364.29 | Employer’s NI | £388.54 | ||
| Deemed Gross Salary | £3,315.71 | Deemed Gross Salary | £3,491.46 | ||
| Salary PAYE & NI | £803.77 | Salary PAYE & NI | £853.35 | ||
| Net Salary | £2,511.94 | Net Salary | £2,638.11 | ||
| Salary & Expenses | £2,711.94 | Salary & Expenses | £2,638.11 | ||
| Total payable | £2,711.94 | Total payable | £2,638.11 | ||
| Take Home % | 68% | Take Home % | 66% | ||
Based on the above example, there could be a loss of £73.83 per month in a contractor’s take home pay. This equates to an annual take home pay reduction of £885.96.
Whereas if you operating via a limited company from 2015/16 to 2016/17, you retain the same take home pay percentage based on a monthly rate of £4,000 and if you operate outside IR35, you can still claim genuine Travel and Subsistence claims. See the example below:
| Limited Company 2015/16 (Outside IR35 with Flat Rate Scheme and with expenses) – based on monthly calculation | |
| Amount Received | £ 4,000.00 |
| FRS Bonus | £ 176.00 |
| CKA Instalment (£160+VAT) | £ 192.00 |
| Salary | £ 920.27 |
| Expenses | £ 200.00 |
| PAYE Tax | £ 18.33 |
| Employees NI | £ 36.40 |
| Employers NI | £ 41.26 |
| Profit Before Tax | £ 2,767.74 |
| Minus Corporation Tax | £ 553.55 |
| Available to Distribute | £ 2,214.19 |
| Dividend Payable | £ 2,214.19 |
| Salary & Expenses | £ 1,120.27 |
| Total returned to you | £ 3,334.46 |
| Take Home % | 83% |
Given the vast reduction in net income and removal of the main benefit of working through an umbrella company, agencies should question whether referring contractors to umbrella companies is the best possible solution for their contractors.
What do the changes mean for you as an agency?
Whilst umbrella companies may have their benefits, the potential removal of its main advantage means the glamour will swiftly be disappearing – as illustrated above. It is crucial for agencies to have reliable and compliant companies on their Preferred Supplier Lists, and it is becoming clear that some umbrella companies are not so trustworthy.
The Risk:
It is near impossible to determine which umbrella companies are not facilitating tax evasion other than trusting their word. Worse still is the potential for some agencies to be incriminated as a result of involvement with tax-evading umbrella companies; this would diminish agency credibility and cause a serious loss in business.
To state that it is more important than ever to have trustworthy and credible companies on your PSL to protect your business is an understatement!
How agencies can avoid being affected:
If you are a recruitment agency helping your contractors decide on a payroll solution, there are options that will maximise your contractors’ take home pay and still allow for some tax relief.
If contractors were to operate their own limited company, and work outside IR35, they would not be affected by the Travel and Subsistence change. Additionally, they may still claim Travel and Subsistence through a limited company where there is genuine cause to do so. This will result in happy clients and more business for you.
How can we help?
Churchill Knight & Associates Ltd can provide your contractors with a tailored quote on their take home pay, and advise them on both the umbrella option and how setting up a limited company for contracting could help them maximise their pay.
By working in partnership with Churchill Knight, agencies may opt to receive excellent compliance training and support in order to rest assured that both contractor and agency are protected. You can also receive guidance on how to work in a HMRC compliant manner.
