There appears to be some confusion within the freelance industry with regard to the proposed MSC Regulations and if they apply to Umbrella Companies who have an HMRC Dispensation to pay expenses.

A Dispensation doesn't allow tax free expenses to be paid. A company with a Dispensation entitles the company not to declare expenses paid on a P11D and doesn't give the company the right to pay expenses. We believe that if Umbrella Companies continue to make untaxed expense payments after 6th April then HMRC may simply make a back dated claim for tax owed direct from the worker through the PAYE system. It is also probable that HMRC will withdraw Dispensations from Umbrella Companies and those companies falling under the 'Managed and Composite Service' definition, meaning that expenses will have to be declared on a P11D which could ultimately end with an unexpected tax bill for the freelancer.

Phil Richards, Chief Executive Officer of Manager Group commented. "An important consideration is that if Umbrella Companies were designed to be exempt from these rules then surely the Government would have allowed 'Composite and Managed' companies to continue to allow workers to claim expenses for travel to and from a temporary contract site? It doesn't seem practical that there could be one rule for Managed Service Providers and one rule for Umbrella Companies for travel expenses."

If the draft legislation comes into force on 6th April the most tax efficient option for the majority of freelancers will be to work via their own Personal Service Company. However this is dependent on their contract rate and length, and their personal preferences.

If a freelancer is only going to be freelancing for a short period and on a relatively low rate then they may well be better to work via a PAYE Umbrella Company. It is important for freelancers to do their calculations to be able to make an informed decision, and to instigate and control the change themselves.

The MSC Legislation is still a proposal and is currently in a consultation period up until 2nd March. Whilst everyone involved in the Freelancing market needs to be aware of possible outcomes, the reality is no one really knows what the final impact of the legislation will be.

After the consultation period is over, the Government will then have to publish clear guidelines. Once this is done everyone should seek advice from trusted sources.