Nov 12 - Ed Balls' - Umbrella Companies and Fuel Duty

Ed Balls, Shadow Chancellor, used his blog on Friday 9^th November to put more pressure on the Government to postpone a rise in fuel duty planned for January 2013. Mr Balls also appeared on the BBC programme World at One to explain how he would pay for such a deferment.

Mr Balls suggests that the Government could balance its books without the planned 3p increase in fuel duty by closing down the tax avoidance “loop-hole” whereby agency workers use umbrella companies to process claims for business related expenses.  Mr Balls suggests that many such arrangements rely on inflated expenses to provide a significant tax advantage.  Indeed, a forecast from HM Revenue and Customs puts the total loss of revenue as a result of these schemes at £650m per year.  I suppose that replacing fuel duty with a clamp down on travel expenses makes sense in a funny sort of way!

The plain fact is that HMRC looked at this very issue under a Labour Government in December 2008.  In a consultation process “temporary workers and overarching employment contracts”, the Government decided to leave the rules unaltered.  So what has changed in the mind of Mr Balls?

There has been a significant increase in high-profile newspaper and radio commentary on the subject of umbrella companies and the phrase ‘mud sticks’ presents a problem to the reputation of the industry as a whole. 

I would vehemently challenge any allegation that the umbrella company concept is a “tax loop-hole”.  This is a legal structure which is available for individuals who do not wish to operate a business through a corporate structure.  They enjoy the benefits of a limited company without the administrative headache of running a business, for a set weekly fee.  I agree that the individual also has the opportunity to set-off business related expenses incurred in travelling to a temporary workplace.  However, the same tax rules apply whether you work through an umbrella company or a standard employment relationship.  It is compliance with the legislation which matters.

Whilst significant HMRC pressure is entirely appropriate for those who intentionally inflate employee travel expenses for personal benefit, it should not be allowed to tarnish the reputation of those companies who operate entirely compliant and ethical arrangements. Whilst HMRC is happy to work hard to promote the amount of revenue it loses due to non-compliant umbrella companies, it does not currently apply the same effort to the investigation and recovery of lost revenue from non-compliant operators.  

It remains to be seen whether George Osborne will act to tighten-up on such arrangements in his Autumn Statement on 5^th December. If he chooses to change the legislation surrounding the temporary workplace rules, there will no doubt be a period of consultation as any change could have dramatic unforeseen consequences for both Tax Credits and Child Tax Credits. 

Mr Osborne should also not lose sight of the fact that the vast majority of umbrella’s pay their taxes on time and ensure that PAYE and NIC is paid over to HMRC on a regular basis.  He will need to avoid the possibility of losing considerable revenue to off-shore and bogus self-employed arrangements which are far more difficult and time consuming for HMRC to investigate.

The need to ensure your umbrella company provider is compliant and communicating effectively with its employees has never been more important.  If you would like to discuss umbrella compliance, please give Alan Nolan a call on 07979 541405.