It’s a subject we get asked about all the time; what is the difference between an umbrella company and intermediaries like ourselves? The question was brought into even keener focus recently with the ruling against such an umbrella company, Exchequer Solutions, with the tax tribunal deciding they were liable for unpaid taxes amounting to an eye-watering £11million.
Incredibly, this figure was deduced based just on expenses payments that hadn’t been taxed, but with over 1000 employees on their books, the cumulative amount calculated ran into millions of pounds.
But it wasn’t just the settlement value of the case that caused attention; this ruling signalled a significant shift in policy, and is a major victory for HMRC, which means contractors should be more vigilant than ever.
So how did the case play out, and what can we learn from the judgment? Well, in the red corner we have Exchequer Solutions: they argued that there was an overarching contract of employment between them and their workers. That meant that for every assignment their contractors were on, they could claim expenses like travel to the site, which would be reimbursed free of tax or National Insurance.
With Exchequer in the red corner, their argument only held up if they could convince the tribunal of their claim that the overarching contract of employment that we mentioned was in place. However, over in the blue corner the HMRC’s counter-argument was that there weren’t the required mutual obligations in place with their contractors to verify it as an overarching contract of employment.
What were these mutual obligations? Well, these can be split down into three areas:
1) Were each of the employees working the requisite 336 hours per year for Exchequer?
2) Would Exchequer be responsible for actively finding new work for the employee should their current contract cease?
3) Had every employee signed a declaration of intent to work elsewhere during their time with Exchequer?
It was in these stipulations that HMRC, in the blue corner, delivered its killer blow. Exchequer were not able to defend themselves fully by proving these mutual obligations had been met. HMRC had Exchequer on the ropes, and the tribunal declared HMRC the winner, albeit in this first-tier case.
If you’re thinking about joining, or are currently under the employment of an umbrella company, it’s important to ask yourself whether each and every financial transaction between you both is correctly taxed. It’s true that this is a first-tier tribunal decision so has no direct bearing on other umbrella companies (each would be looked at on a case-by-case basis), but it suggests a worrying trend!
EEBS Vs Umbrella Company Comparison
So, back to the umbrella company comparison: you’d be forgiven for confusing or grouping us all under - ahem, the same umbrella! However, the cornerstone upon which all umbrella companies operate is that employment contract.
But that relationship is, in essence, a zero-hours contract, and the umbrella company only pays its employees for the work that they do. The principle selling point for the umbrella company is a perceived higher take-home pay, owing to the potential of claiming expenses that aren’t taxed, but as you can see from the recent ruling, HMRC takes a hard line in what it sees as potential tax avoidance in this way.
At EEBS there are no contrived arrangements: we simply pay our subcontractors (who have usually been introduced to us by the client) for the work they do for our clients - but only after a detailed review that confirms that the working arrangements are compliant with all of the relevant legislation.
To be honest we’ve never been a fan of the umbrella company “solution” – in our opinion it pushes the boundaries of what HMRC finds acceptable to far. On the other hand EEBS has over fifty clients who have been investigated by HMRC whilst using our services, and our business model has never been challenged – perhaps that’s the umbrella company comparison in a nutshell!
