Labour Tax Plan
Umbrella Companies are in uproar over the Labour Tax Plan, announced yesterday by Ed Milliband, which would see umbrella company contractors not able to claim expenses and subsistence against tax.
He and the Labour see the claiming of expenses and subsistence to offset against tax as tax avoidance. They reckon that a crackdown on it will net them an extra £650m a year. They plan to spend this on the National Health Service.
The Umbrella Companies provide a payroll, admin and accounting service to contractors who may be caught by IR35 or who just don’t want to do the paperwork.
The contractor is effectively an employee of the Umbrella Company. All they do is fill in a timesheet. The Umbrella Company invoices the client company, subtracts the tax after expenses and subsistence allowances are deducted and pays the contractor.
However, Labour see the small amount of expenses that umbrella company contractors are able to offset against tax as tax avoidance. The Labour Tax Plan would stop this.
Umbrella Company Reasons
One of the reasons contractors go into umbrella companies is because they are able to claim those expenses.
Indeed the Government could lose out if lots of umbrella company contractors decided that it wasn’t worth it any more and decided to take their chance with IR35 and set up a Limited Company like virtually all contractors used to do before IR35.
There are an estimated 200,000 contractors in Umbrella Companies.
I’ve done the Maths. If Labour are to save £650m that way then they are expecting to make £3,250 per contractor after they bring in this new law (if elected).
Labour Tax Plan – Treasury Gets More
However, it is reckoned that the Treasury gets £10,000 more in tax and national insurance contributions from an Umbrella Company contractor than from a Limited Company contractor.
Some contractors are sure to become Limited Company contractors again, if the Labour tax plan gets implemented, if their umbrella companies were not able to offer them that tax relief.
Graham Jenner, Director at NoPalaver, says:-
“Umbrella companies provide a very useful service by providing an efficient way for income tax and National Insurance Contributions to be collected from large numbers of workers by one company. This makes it much easier for HMRC to administer the tax of large numbers of self-employed people.”
Umbrella Companies Uneconomic to Run
He said that removing the tax relief would make umbrella companies uneconomic to run. They charge their contractors monthly. In return they are able to get contractors some tax relief. If there was no tax relief there wouldn’t be much point in contractors using umbrella companies – especially if they were being charged for it.
Said Graham Jenner: “Getting rid of umbrella companies could encourage more self-employed people to set up as limited company contractors, which are much harder for HMRC to police for any tax discrepancies.
“Jeopardising what has proven to be an effective and efficient way to collect income tax and national insurance contributions is a big risk to take for the small reward of bringing in a marginal amount of extra income from expenses deductions.”
Labour Tax Plan Should be Challenged
“The assumption that people employed by umbrella companies should not be entitled to tax-deductible expenses should be challenged. Flexible workers paid through an umbrella company are not like full-time employees – for example, they don’t travel to the same job in the same place every day.
“Removing this allowance may make it uneconomic for them to work as contractors, and the businesses that benefit from access to a flexible skills base will be the losers.”
The Labour Tax Plans have not gone down well with Umbrella Companies who can see their businesses collapsing.