During April 2015 and following the Governments consultation to determine common rules explaining how Employment Intermediaries, commonly known as Umbrella Companies should work, team members, both past and present, completed a questionnaire.

The results were published in May 2015 and provided an interesting and useful insight into the current arrangements employed throughout the Supply Market surrounding the issue of pay and the measure that some have been encouraged to adopt aiming to reduce tax liability with regard the claiming of subsistence and travel expenses to and from a place of work.

Our survey makes it clear that around 50% of those questioned have either used or currently use the services of an Umbrella Company and yet only 23% are aware of what an Umbrella Company is. Put simply 27% of those questioned are engaged within a tax savings scheme that they do not fully understand.

In an attempt to improve that situation the following information may assist:

What is an umbrella company?

An umbrella company allows workers to trade as registered temporary contractors. Umbrella companies act as nominal ‘employers’ for contract workers, and as such helps the contractor to claim business expenses, process payroll and benefit from small business tax relief. Contractors who work under umbrella companies will be required to pay a fee to the Umbrella Company to administer the scheme on their behalf.

What advantages do they provide?

The main financial benefit of using an Umbrella Company is the off-setting of business expenses. HMRC has strict guidelines about what expenses can be legitimately offset, and in what circumstances but in general terms, if you are at a temporary place of work, and expect to be there for less than 2 years, then the cost of travel to the temporary site, accommodation if you need to stay away from home, subsistence and tools specific to the contractor, are all able to be offset against tax.

What is the difference between offshore and onshore umbrella companies?

Onshore umbrella companies operate from within the country in which their contractors work, and as such pay tax as required by the nation’s governing bodies. Offshore umbrella companies, however, take advantage of so-called offshore ‘tax havens’ to offer their contractors more attractive tax rates.

Is this significant?

The Government, with cross party support, aims to raise £5 billion in tackling tax avoidance schemes. Whilst tax avoidance is not illegal (it is the practice of using current tax laws within the letter, but not the spirit of the law to minimise tax liabilities) it is anticipated that the Government will introduce legislation to redefine some existing tax avoidance schemes, as schemes of evasion as such are illegal. What is not yet clear is whether the use of Overarching Contracts of Employment which involve the use of either On or Off Shore Employment Intermediaries will fall into this area of redefinition.

Jonathan Dakin, Managing Director of ESL commented “ESL awaits further clarity on this issue, with 50% of those surveyed indicating that have either used or currently use the services of an Umbrella Company this is clearly a significant issue for all those involved in the provision of Supply Staff into Britain’s schools. In the meantime please be assured that we will continue to pay all team members under the existing UK PAYE Tax System maintaining a wholly compliant approach ensuring compliance with both the letter and spirit of the law and ensuring no future end user liability.”