Main contractors hiring workers via labour supply agencies that use “umbrella” payroll solutions are being warned that changes announced in this week’s Budget are likely to spell the end of umbrella schemes as they exist today.
The Budget document contained an announcement that there would be a consultation on removing the ability to claim travel and subsistence allowance for any worker hired via an intermediary that supplies “supervision, direction or control”.
But Ship Shape Pay, which provides software and accountancy services to umbrella schemes, says that it subsequently received an email from HMRC explaining its intention to “remove” the travel and subsistence relief from April 2016.
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Ship Shape’s chief executive Howard Hughes explained that this would remove the fundamental advantage exploited by umbrella schemes: the tax-free sums workers can receive to cover travel and subsistence means that they are then able to absorb the cost of employer’s National Insurance and paid absence they have to pay to be part of the umbrella scheme.
The result, said Hughes, is that agency workers would no longer accept umbrella contracts – as their pay would slump by around 20% – and would instead seek PAYE direct employment.
In addition, the inability to claim travel expenses could restrict the distance workers are willing to travel, reducing the “catchment area” of a site and exacerbating skills shortages.
"In April next year all current umbrella workers will require a new payment solution, or they will seek new employers. If HMRC has its way, industries where umbrella is common will experience an increase in the cost of labour approaching 20% through increased National Insurance and paid absence."
Howard Hughes, Ship Shape Pay
Hughes said: “The bottom line is that in April next year all current umbrella workers will require a new payment solution, or they will seek new employers. If HMRC has its way, industries where umbrella is common will experience an increase in the cost of labour approaching 20% through increased National Insurance and paid absence. That will need to be absorbed in higher charges to end hirers, reduced agency margins and lower pay rates to workers currently paid through umbrella.”
Umbrella schemes grew in popularity last year after HMRC introduced new rules that said workers employed via intermediaries where there was “supervision, direction and control” had to be taxed as employees.
Hughes added: “Huge groups of workers went from CIS subcontracting to umbrella structures, and we worked with the umbrella companies and labour agencies to help ensure they didn’t lose out.
“Now, the HMRC is saying hard and fast that they must be directly employed so the costs [of employer’s NI and paid leave] can no longer be avoided. The cost will be passed back to the supply chain – it could be a 20% increase in the cost of labour.”
However, he said that one way forward for main contractors would be to stop using intermediary agencies, allowing them to move some individual subcontractors back on to CIS, while also transitioning others on to PAYE.
“Employers need to look at it holistically and mathematically to see how much it’s going to cost them, and have plans in place by Q3,” he suggested.
