Umbrella companies are an employment and tax problem in need of a solution

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I should have mentioned a tax case that I think has some significance that has been won by HMRC in the last week or so.

The case was brought against Reeds, the temporary employment agency and found that the company was liable to pay £158 million of extra income tax and national insurance. The basis for the charge is that expenses paid by the company to employees for travel and other expenses they supposedly incurred in the course of their employment were found not to be incurred for that purpose but were instead taxable benefits in kind and so were subject to tax.

I do not propose to make this a discussion of the technical merits of the case, which appears to have revolved mainly around whether or not the Reed employees had an employment or a series of temporary engagements (the latter being ruled to be the case, meaning there was not one work place but many so that travel to each was not tax allowable as had been claimed) and instead concentrate on the broader issue here.

The most superficial of reviews of the internet will show that despite various changes in tax rules over the intervening years the role of so called umbrella companies in the temp market remains significant, and most will advertise that they can significantly reduce a person's effective tax rate by allowing the reimbursement of expenses as part of pay, moving them outside the scope of tax, it is claimed.

The Reeds case may obviously impact on this claim: I am not making prediction on that issue. What I am saying is that it seems that this whole area remains out of control. Umbrella companies are undoubtedly engaged as intermediaries by some employers to reduce or remove their obligations to employees e.g. to make pension contributions or offer security of contract.

The companies themselves promote an environment in which tax abuse appears endemic.

Both situations are abusive of the intent of fair tax and labour market regulation. I have no answer at present; I will be candid about that. But I do think it an issue needing to be addressed.