Should umbrella company directors be asked to guarantee tax liability?

No one can question whether the umbrella market is going through a period of uncertainty following the new restriction of tax relief on travel and subsistence expenses, says the legal and compliance consultancy Lawspeed, which specialises in advising the recruitment sector and supply agencies.

“It’s now all about risk”, observes Theresa Mimnagh, Associate Director of Lawspeed. “Prior to 6th April 2016, working with umbrella companies appeared to be a relatively safe solution for agencies that wanted to allow their contractors to maximise tax benefits without the potential of liability. Only a few precautionary steps needed to have been taken. However, since that date, the entire umbrella model is under threat and service providers are inevitably looking to find different ways to service the industry or otherwise participate.”

With a plethora of tax rules now in place, based upon HMRC’s concept that agencies should be liable where there is non-compliance, Lawspeed believes that the risk factor for agencies has been ramped up.

“This is a real shame” remarks Mimnagh. “Whilst it is possible to understand why HMRC has taken the steps it has, based on massive growth in the sector and HMRC’s belief that there has been non-compliance in many cases as evidenced by the recently reported case of Christianuyi Ltd & Ors v Revenue & Customs, the placing of liability in this way, coupled with the attack on the umbrella expenses model represents a particular threat to agencies that want to offer flexible solutions. There will undoubtedly be fall out in the market place, but our job at Lawspeed is to advise our clients on the risks that arise and recommend solutions. If I was operating an umbrella company I would be looking at all options and considering how I can use my existing resources to operate a profitable business – that may include servicing of hirers directly. Agencies should factor this into their policies.”

“Feedback from our recruiter clients is that they want to continue dealing with umbrella companies but without the additional risks that are now in play. As the relationship between an agency and an umbrella relies upon trust as to how the umbrella is actually operating, and the agency’s liability can arise through no fault of its own long after the umbrella company may have ceased to operate, it makes sense to consider putting in place a guarantee from the umbrella’s director”, states Mimnagh.  “Only the director knows how the umbrella is actually operating and what its plans are for the future. Having seen claims against agencies arise where there has been non-compliance despite stringent contracts in place, we believe a guarantee represents a way ahead and will re-establish the trust that is necessary.”

Last week the FCSA advised its members not to sign any such guarantee on the basis that it is disproportionate and represents an abuse of the agencies’ position in the relationship. However, given that personal guarantees are common in the finance and lending industry and that agencies cannot protect themselves in any other way in the circumstances in which there is uncertainty as to the compliance of models now on offer, Lawspeed advises that a personal guarantee should be considered by cautious agencies. “Putting it another way”, explains Mimnagh, “the assurance offered by a guarantee must instil confidence and give the umbrella company the best shot at winning new business.”

Lawspeed will be discussing this and a whole range of other tax-related relationship issues at its forthcoming “Taxing Times” seminar in London on 16th June 2016. “Agencies face a particular number of potential threats as a result of the recent tax changes and we will be reviewing all of these, clarifying the actual position and advising upon practical steps that can be taken to avoid losing out”, says Mimnagh.

For more information on this subject please call Lawspeed on 01273 236236