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The Government has called time on Travel and Subsistence claims where a contractor is working via an umbrella company. The changes are expected to have a huge impact on the take home pay of contractors working through an umbrella company as the main benefit of using an umbrella company will be removed as of 6th April 2016 when the changes takes place.
What is a Travel and Subsistence claim?
To recap, as confirmed in the Autumn Statement and Finance Bill 2016, 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 against the cost of these.
Why are the rules changing?
The Chancellor wants to end this method of tax relief, as it was 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 in the eyes of the HMRC. In addition, as confirmed by the Finance Bill 2016 on 9th December 2015, contractors operating through an umbrella company would not pass the supervision, direction, control (SDC) test.
Additionally, many are making false expense claims for journeys that never occurred, and some umbrella companies – who know full well 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.
Some recruitment agencies may also be concerned about how this could impact them. If they are found to be referring contractors to umbrella companies that assist in making false expense claims, then they won’t be seen as trust-worthy or reputable.
What does this mean for your umbrella contractors?
With the abolishment of Travel and Subsistence claims from 6th April 2016, most contractors operating via an umbrella company will find they have a reduced take home pay from 68% to 66%.
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 | |
| FRS Bonus | £ 00.00 | FRS Bonus | £ 00.00 | |
| CKA Instalment | £ 120.00 | CKA Instalment | £ 120.00 | |
| Deemed Grossed Salary | £ 3,491.46 | Deemed Gross Salary | £ 3,491.46 | |
| Expenses | £ 200.00 | Expenses | £ 00.00 | |
| Employer’s NI | £ 364.29 | Employer’s NI | £ 388.54 | |
| Employee’s NI | £ 00.00 | Employee’s NI | £ 00.00 | |
| 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 | £ 2,638.11 | |
| Total Payable | £ 2,711.91 | Total Payable | £ 2,638.11 | |
| Take Home Percentage | 68% | Take Home Percentage | 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 are 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:
| Umbrella Company – 2016/17 (without expenses) – based on a monthly calculation | Limited Company (with expenses) – based on a monthly calculation outside IR35 | |||
| Monthly Rate | £ 4,000.00 | Monthly Rate | £ 4,000.00 | |
| FRS Bonus | £ 00.00 | FRS Bonus | £ 176.00 | |
| CKA Instalment | £ 120.00 | CKA Instalment | £ 192.00 | |
| Deemed Grossed Salary | £ 3,491.46 | Gross Salary (based on £10,600 PA) | £ 883.33 | |
| Expenses | £ 00.00 | Expenses | £ 200.00 | |
| Employer’s NI | £ 388.54 | Employer’s NI | £ 28.61 | |
| Employee’s NI | £ 00.00 | Employee’s NI | £ 25.40 | |
| Profit Before Tax | £ 2,872.05 | |||
| Corporation Tax | £ 574.41 | |||
| Salary PAYE & NI | £ 853.35 | Salary & Expenses | £ 1,057.93 | |
| Net Salary | £ 2,638.11 | Dividend Payable | £ 2,297.64 | |
| Total Payable | £ 2,638.11 | Total Payable | £ 3,355.58 | |
| Take Home Percentage | 66% | Take Home Percentage | 84% | |
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 removal of one of its main advantages 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 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 expenses 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.
If you found this article useful, you may also be interested to read our Autumn Statement 2015 or learn how to advise your clients about the dangers of cheap accounting.
We're regularly adding new, helpful content
The Churchill Knight blog is regularly updated with helpful content for contractors and freelancers – especially articles that answer the most frequently asked questions about umbrella companies! Please pop back shortly to see the latest articles written by Andrew Trodden (Marketing Manager) and Clare Denison (Marketing Executive).