Personal Service Companies – Umbrella Alternative?

With the announcement of the amendments to the Travel & Subsistence legislation with the introduction two new sections 339A and 688B into the Income Tax Earning & Pensions Act (ITEPA), the landscape for the Umbrella Companies as we know is set to change.

With these amendments, from April 2016 most umbrella contractors will not be able to claim travel and subsistence expenses to reduce their tax and NI liability. For more details, read the separate article titled T&S Legislation 2016 – end of road for Umbrella Payroll companies?

Outlook for Umbrellas

The Umbrella companies that relies solely on the expenses as their business model will struggle to justify their existence. In the absence of the expenses, contractors will not only have to bear the full cost of tax and employee NI but also have to foot the bill for increased ERNI cost. No one will want to get paid by Umbrellas. At the same time, not many Agencies will want to take the burden of paying these contractors under their PAYE either! It’s not just the cost of ERNI that the agencies resist – but a whole load of other compliance responsibilities, costs and risks that come as a package along with the PAYE scheme.

Contractors wouldn’t able to digest Umbrellas anymore; Agencies would resist PAYE and Umbrellas have to find a way to stay in the business.

Can PSCs replace Umbrellas?

The obvious and only choice left for most umbrella companies is to embrace Personal Service Company model. Sounds logical, but will it work for the low and medium rate contractors that are paid weekly?

PSCs work well for the contractors who are paid monthly, who wouldn’t mind a few days delay in getting paid and who has the time and resources to manage a limited company. Most PSCs invoice the agencies and get paid by the agencies directly. The accountant or the service provider usually plays an “advisory” role and manages the book-keeping and payroll affairs. It’s up to the contractor to pay himself the right amount of salary, dividend and expenses and make sure all HMRC dues are paid on time. Think about the chaos this model can unleash for your weekly paid contractors who have relied on your for their tax affairs and who are used to get paid on every Friday.

Why traditional PSCs would be a non-starter?

  • Suddenly you are faced with hundreds of companies, not contractors! You need to know which the company the contractor belongs to even before you can process the timesheets and invoices. If you have to process a few hundred contractors’ payment, you will need an army of people!
  • You have no control on the money flow – with agencies paying the PSCs directly! And Agencies will have to deal with hundreds of separate payments instead of handful of payments to Umbrellas
  • Assuming agencies accept this challenge, you are faced with the next challenge. You will have no clue when the money hits the PSC’s bank account. Which means, you cannot run payroll and dividend calculations accurately.
  • If you manage to get this past somehow, you will have the task of completing RTI for hundreds of companies.
  • Then make sure that PAYE payments are made to HMRC!

The list of issues can go on and on….

Is there a Perfect Alternative to Umbrella?

We believe, yes there is and it’s none other than a PSC model, albeit with a difference perspective. Our Solus PSC solution resolve each of the issues elegantly and provide a perfect transition to the agencies and the contractors from Umbrella to PSCs. If you want to know more about it, contact us today.