Many will know that in April 2017 Public Authorities were instructed by HMRC to decide on the IR35 status of their workers. More details can be found at:
Pay More Tax
The change in legislation meant that many workers were placed on payroll often through an Umbrella Company. The result of this would see more taxes collected by HMRC mainly in the form of employees and employers National Insurance contributions.
This should leave the worker worse off as they would pay employees National Insurance.
However we’re finding that workers operating through an Umbrella Company are better off.
It seems that there is a rather loose application of Expenses rules being operated by some, not all, Umbrella Companies.
We’ve seen a pay slip for an NHS worker where, in just one week, expenses of over a thousand pounds have been put through on the payroll.
The amount of the tax liability is reduced by allowable expenses being taken off of the gross pay before PAYE is calculated.
Less tax is paid as a result of expenses.
The problem is that the worker has not claimed the expenses and is not even aware of what they are!
They seem to have been applied by the Umbrella Company without approval or explanation.
That means that tax in excess of £200 (at basic rate) for the one week has been evaded. If that continues over a year that will mount up to thousands of pounds of evaded tax!
The daft thing is that the worker is BETTER OFF on payroll rather than when they worked through their own limited company; which clearly was NOT what HMRC intended when the legislation was changed in April 2017.
Tax disaster waiting to happen
All this seems like a tax disaster waiting to happen; pretty much like the 40,000 contractors who have used Tax Schemes and now have until 2019 to settle the outstanding tax liability now that HMRC have caught up with that loophole.
HMRC Crack Down on Umbrella Company Expenses?
There is not one part of me that doesn’t believe that HMRC will crack down on the application of expenses to employees working through Umbrella Companies and when that happens it’s likely be the worker who gets an unexpected tax bill.
If you do find yourself in a position where your chosen Umbrella Company is making deductions from your pay without your approval the first thing to do is to query the deductions made.
Expenses should only be accounted for if they have been incurred or there is an agreed HMRC dispensation for expenses to be claimed.
If the Umbrella Company is unable to explain the expenses claimed ask them to take them off and amend the pay slip.
The very best advice I can give is not to use Umbrella Companies who operate in this way unless they are prepared to underwrite any fines and penalties that you will incur should HMRC investigate and find additional tax needs to be paid.
Operating through an Umbrella Company does not mean that the rules applicable to Employee Expenses can be disregarded.
You may want to consider finding a new Umbrella Company to work with if your current provider doesn’t follow the Employee Expenses rules.
Pay the right amount of tax – you know it makes sense.