The UK Chancellor’s Autumn Statement 2014 posed a number of questions for umbrella companies, with the Chancellor announcing that the government plans to scrutinise umbrella companies as part of tackling tax avoidance.

The Chancellor announced that “the government will stop tax relief from being claimed on reimbursed business expenses when they are paid in conjunction with a salary sacrifice scheme”.

The statement further noted that “the government is also concerned at the growing use of overarching contracts of employment by employment intermediaries such as ‘umbrella companies’, which allow some temporary workers to benefit from tax relief for home-to-work travel expenses that is not generally available to other workers. The government will review these arrangements and publish a discussion document inviting representations from interested parties to inform potential future action”.

Umbrella companies are structured so that they can take advantage of the tax expenses rules which, within certain parameters, allow travel costs to a temporary workplace to be reimbursed tax free.

Umbrella companies structure their workers’ remuneration as a combination of salary and reimbursed expenses which gives rise to a PAYE and national insurance contribution (NIC) saving including the employer’s NIC which is a significant company cost at 13.8%.

Any removal of the ability to achieve these tax savings (especially to save the 13.8% NIC) will have a significant impact on this sector as it will be a direct cost to umbrella companies.

Samantha Hurley, Head of External Affairs at the Association of Professional Staffing Companies (APSCo), said: “APSCo supports any moves to remove abuse and provide a level-playing field.

“However, it is important that the government does not lose sight of the fact that many of the umbrella companies operating in the professional recruitment sector are fully compliant, and provide an important link in the flexible recruitment supply chain.”

Matt Walters is Client Compliance Manager at international contract management specialists Capital Tax Consulting.