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Contractor group warns over umbrella company expenses

Published on Oct 9, 2008 |

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The leading contractor representative group has called on the Government not to take "heavy-handed action" which would result in the removal of tax relief on expenses.

The Professional Contractors Group (PCG) said its warning was of particular concern to contractors working through umbrella companies.

John Brazier, MD of the PCG said:

"PCG supports the presence of umbrella companies in the marketplace.

"We do not want to see any heavy-handed action that would make them unviable. At the same time, we are aware that the way some umbrellas use expenses policies is a genuine problem."

The PCG's response to the Government's consultation on tax relief for travel expenses sets out the concerns of many freelancers on the issue. It points out that umbrella companies often operate a hybrid model of "PAYE + expenses" under which tax-free expenses payments are partly used in place of salary, irrespective of whether expenses have actually been incurred or not. Incredibly, under dispensations from HMRC, such practices can be entirely legal - though they are clearly not what dispensations are intended for.

The organisation urges the Government to focus on the dispensation system and enforce the rules properly, rather than barring certain categories of worker from receiving expenses at all as it had suggested.

It also cautions against a debt transfer mechanism being imposed on umbrellas, on the basis that this principle has still not been fully tested under the Managed Service Company rules.

The PCG response also cautions HMRC against revoking the VAT Staff Hire Concession, which would increase the cost of hiring people just when economic conditions are getting tough; interfering with umbrellas would compound this.

"Freelancers must continue to be entitled to tax relief on genuine expenses, even if they use umbrella companies," said Mr Brazier. "The Government has pledged not to interfere with expenses for freelancers using their own limited companies, and there can be no justification for attacking umbrella workers either. Employees of large consultancies can still claim expenses; independent freelance consultants must not be put at a competitive disadvantage."