Umbrella companies that lower tax and NI payments to be targeted
The government is announcing plans in its Autumn Statement to get tougher on the use of personal service companies – special organisations, including ‘umbrella companies’, that can be used so individuals pay lower tax and national insurance (NI) contributions.
It has been predicted that tightening the rules (also known as IR35 regulations) around consultants and contractors setting themselves up in ‘false self-employment’ will raise £400 million in tax for the Exchequer. The government has proposed obliging those using personal service companies to move onto their employer’s payroll if they work for a business for more than a month. However, it’s likely that certain legitimate uses of personal service companies will still be allowed; for example, IT workers who work for a short period or for different companies at the same time.
One of the main concerns around the tighter regulations is that, after such a short time, employers will have to apply a ‘supervision, direction or control’ test to determine whether the individual is an employee or contracted to them as a personal service company. The Association of Professional Staffing Companies (APSCo) believes this will disproportionately impact sectors such as financial services, which use a high proportion of contractors.
Samantha Hurley, APSCo’s head of external relations, said: “The key here is the appropriateness of the status test, which will be used to decide if a contractor is genuinely self-employed for tax purposes. The consequences of an inappropriate status test could be devastating to the professional flexible labour market and UK plc.” She added that the public sector has a six-month period in which it determines a contractor’s employment status.
Separately, a consultation has just closed on the government’s planned changes to the tax and NI treatment of termination payments. The key proposals are to simplify the rules to payment in lieu of notice and termination payments by removing the difference in treatment between contractual and non-contractual termination payments and lowering the current £30,000 tax-free threshold to an amount calculated by length of service. Furthermore, this tax-free amount would only apply to those undergoing redundancy or receiving a tribunal award, despite the fact exit payments can be made for several reasons, such as performance or restructuring that falls short of redundancy.
A recent survey by law firm Fox Williams has thrown up concerns from employers over the proposals, with almost half (48 per cent) believing it would lengthen negotiations with employees about their reasons for departure, and 43 per cent suggesting it would increase grievances. Nine out of 10 respondents said it would be HMRC that would benefit most from the changes, and half feel it would mean a rise in legal costs for employers.