Tax Case Highlights Concerns over Umbrella Companies' Compliance

Issue Date: 6th February 2012

There has been a considerable degree of commentary in the media following the publication of the tax tribunal’s decision not to allow Reed’s appeal against a £158 million tax assessment. The tax and National Insurance contributions assessed were in relation to “expenses” payments made to temporary employees, under two successive travel allowance schemes operated by Reed between 1998 and 2006. Today’s umbrella companies typically operate a similar model, and so the case has added to wider concerns surrounding the compliance of umbrella companies.

Simon Kite, a partner at Top 20 accountancy firm Saffrey Champness, comments:
 
“The Reed case relates to schemes operated some years ago, and at a time when HM Revenue & Customs, professional advisers and service providers in the industry were developing their thinking and approach to umbrella companies and, in particular, in relation to expenses and overarching contracts of employment. Although there is now a higher level of awareness and understanding of the technical tax and legal issues facing umbrella companies, we continue to see a wide range in the level of compliance across individual umbrella companies.”
 
Simon continues:
 
“The Reed case highlights the importance of implementing any tax planning arrangements carefully, paying attention to the documentation and ensuring that the parties to the arrangements understand them. Reed's travel allowances scheme fell at the first hurdle as the documentation and communication to employees was unclear and this lead the Tribunal to conclude that there had not been an effective sacrifice of salary from the outset.
 
“The Reed case serves to remind umbrella companies, as well as the businesses and employees contracting with them, of the potential for non-compliance with legislation to be expensive and damaging to a business.
 
“Agencies contracting with umbrella companies are strongly advised to undertake appropriate due diligence on their providers and umbrella companies themselves should seek professional advice where required, to satisfy themselves that their business is operating compliantly.”
 
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ContractorUmbrella is proud to have undergone a thorough audit by Saffrey Champness, which aims to check numerous processes and proceedure within the business. For more infomation on the areas covered within the audit, please visit our Saffrey Champness Guide to Compliance page.