The agency and contracting market really has been through the wringer in recent budgets, and on the dawn of the new tax year, it doesn’t seem to be brightening up. The shelter from the storm provided by umbrella companies being the most recent victim of the chancellor’s focus on the market.

There is a whole bundle of legislation that has come into force for 2016/17 that affects the way umbrella companies are able to operate.

Like all employers, the new national living wage will have increased the costs on all umbrella companies, with the ‘breakeven point’ at which they can supply labour significantly higher, which will either squeeze profit margins, or result in renegotiations of contracts with end client, or both.

The highly publicised new rules governing travel and subsistence came into force from April, and have somewhat predictably been enough to result in a large number of umbrella companies leave the contracting market entirely.

In simple terms, the change in legislation meant that an umbrella company is no longer able to treat travel and subsistence expenses to their employees where anybody in the contractual chain has Supervision, Direction or Control (SDC) over that employee. Where there is SDC the assignment to the end client is treated as a permanent workplace rather than a temporary workplace. As the workplace is considered a permanent workplace, the 24 month rule for the allowance of travel and subsistence to that temporary workplace falls away.

This halted the perceived tax advantage to the employee from tax free travel and subsistence by being employed via an umbrella company over a direct employment.

The chancellor aimed to ensure that 2016/17 really did mean the end of umbrella companies, and introduced a second piece of legislation via the new salary sacrifice for expenses legislation to catch umbrella companies that were confident their contractual arrangements didn’t fall foul of SDC.

The new 289A ITEPA legislation stops the tax free reimbursement of expenses when they are paid under an arrangement with employees “to whom an amount is paid or reimbursed in respect of expenses… under which the amount of other general earnings or specific employment income received by the employee depends on the amount of the payment or reimbursement”. This definition essentially summarises how umbrella companies managed their payrolls prior to 2016/17, where the level of an employee’s taxable income fluctuated depending on the expenses they claimed.

With these two pieces of legislation the chancellor has brought about the down fall of the umbrella company as a safe haven for those working in the agency and contracting markets. This leaves the market looking for a new solution, and whilst many schemes have been doing the rounds, the reality is there is no one size fits all solution anymore.

Those in the market with high fee income individuals might be looking towards the personal service company route, but this comes with its own headaches in the form of IR35, managed service company legislation, and threats from the chancellor and the treasury that they’re not done looking at this yet.

Some in the market will move back to self-employment, where there is confidence that the workers are not under SDC, and with the added protection of insurance against section 44 liabilities enough to feel that contracting in this way is safe again.

Of the umbrella companies still operating in the market, they are doing one of two things:

• Transitioning away from umbrella company to payroll bureau/employment company – accepting SDC applies and relying on the fact that the employee is unable to be employed directly, but the employees are still happy to be employed by the intermediary company, so they can work with their desired end client.

• The other more scary option taken by some ‘rogue’ umbrella companies is simply to bury their head in the sand, pretend the legislation doesn’t apply to them, and carry on with business as usual.

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