Employer FAQ – Employment StatusWednesday, June 24th, 2009
What are the tax and NICs requirements for workers in “Umbrella Companies”?
Like Personal Service Companies (PSCs) and Managed Service Companies (MSCs), businesses known as “umbrella companies” supply the services of workers to end clients. However, unlike PCSs and MSCs, the umbrella company is not an intermediary and the workers are not directors or shareholders. Rather, the workers are engaged under a contract of employment by the umbrella company and, as the employer, the umbrella company deducts PAYE tax and Class 1 NICs from payments made to the workers. They are also entitled to full contractual and statutory employment rights.
The concept of the “umbrella company” was developed in response to the introduction of the MSC legislation in April 2007. No attempt is made to avoid or limit the amounts of PAYE tax and Class 1 NICs paid. Instead, the arrangement is intended to create circumstances in which tax is avoided on payments of travel accommodation and subsistence expenses.
The use of the term “umbrella” relates to the nature of the contracts involved in the arrangements. The employment contract is known as an “overarching” employment contract as it relates to the services that the worker provides for a number of end clients. The worker performs no work directly for the umbrella company. Each worker may source engagements directly with end clients, or may use an agency to source engagements. The contract for the worker’s services is between the end client and the umbrella company or the agency, as appropriate. The umbrella company’s sole source of income, therefore, is from contracts with a number of end clients and/or a number of agencies. From the payments received under those contracts, the umbrella company deducts administration fees and sums towards future holiday pay before paying the worker’s salary and deducting tax and NICs.
During 2008, the government consulted over what it considered to be serious exploitation by umbrella companies of the travel and subsistence expenses legislation. The “overarching” contract allows each end client’s workplace to be treated as a temporary place of work, thus allowing the worker to claim tax relief on the travel, accommodation and subsistence expenses incurred when working at those workplaces. Under the MSC legislation, all such workplaces are treated as permanent places of work and, as such, no tax relief is allowed.
However, since consulting on the issues, HMRC has taken no action to restrict the operation of umbrella companies and the tax advantages they provide.
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