The Chancellor confirmed recently that, with effect from April 2016, people working through intermediaries will no longer be able to claim expenses for travel and subsistence.
While the move was expected, it will have a substantial impact on agency workers as it will increase the amount of their pay that is subject to tax and national insurance.
Historically, umbrella companies engage agency workers for various assignments, making their place of work temporary and allowing them to claim travel and subsistence on a weekly basis rather than on a retrospective annual basis.
The change also applies to limited company directors who are working inside IR35.
This way of working was beneficial because:
- The Agency can avoid issues around employment rights and costs.
- The umbrella company makes a margin.
- Employees are able to claim expenses which could not be claimed if they were directly engaged by the agency.
The change in legislation is the result of the recent significant growth in the number of umbrella companies, caused in part by HMRC’s clampdown on self-employed working, leading to more people claiming expenses to which the Government does not believe they are entitled.
Trade unions also lobbied the government hard to tackle the use of umbrella companies. The biggest loser in all of this is the worker, because if they have to work directly for agencies, the agencies won’t pass the extra costs of PAYE to their clients, so employees will suffer reduced income.
Agencies can still use umbrella companies to outsource payroll and employment law, but individuals will be considerably worse off.
Other options for agencies are that workers operate their own limited companies, but that is only suitable if the individuals are earning good money. The possibility that HMRC may make examples of some of the limited company service providers who sail too close to the wind with regard to Managed Service Company rules means agencies are likely to become twitchy about which suppliers they recommend for this service.
The last option for agencies is to reconsider engaging self-employed people, but this comes with risks following the change to s44 ITEPA in 2014. Agencies must fully consider the position, take expert advice and be prepared that some people will not be able to be self-employed.
RIFT Legal Services can provide the expert employment status advice an agency needs.