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Umbrella contractors to benefit from new expenses rules

Umbrella company contractors could potentially benefit from change to expenses rules. This has arisen from a recent government consultation on National Minimum Wage (NMW) workers and their travel and subsistence expenses schemes.

According to Dave Chaplin, CEO of ContractorCalculator, the changes could ease the situation many contractors face when being paid ‘expenses’ that ultimately benefit their umbrella employer and not them.

He says: “Some umbrella solutions providers have paid their contractors ‘expenses’ to mitigate tax, payments which should have been classed as salary. Fortunately this consultation confirms HMRC’s commitment to focusing on compliance in this area.”

Dealing with bad practice by some umbrellas

Although as employers, umbrella companies are required to pay their contractor employees the national minimum wage, some choose not to. Instead, they subsidise the earnings of contractors on their books by substituting expenses for contractor’s wages, thus artificially bumping-up earnings to comply with NMW requirements.

Some umbrella solutions providers have paid their contractors 'expenses' to mitigate tax, payments which should have been classed as salary. Fortunately this consultation confirms HMRC's commitment to focusing on compliance in this area

Dave Chaplin, ContractorCalculator

However, as a result of a Treasury consultation on the issue, changes to the rules will make it harder for umbrella solutions providers to exploit lower earning contractors by claiming expenses paid are actually wages.

Umbrella expenses could be revisited

In paragraph 5.5 of the government’s response to the NMW questions, the continued non-compliance of employment businesses has been highlighted. This raises a worrying spectre for umbrella companies that believed that with the change of government there would be a change in focus away from compliance issues. This is clearly not the case.

The proposed amendment to the NMW regulations will exclude ‘payments of expenses for travel to a temporary workplace from counting as pay for NMW purposes’, and if adopted will come into force on 1st January 2011.

Published: 29 July 2010

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