HMRC has outlined its plans to outlaw the exploitation of travel and subsistence rules via the use of overarching contracts of employment, which have been used by a minority of umbrella firms to avoid millions in taxes, whilst also distorting the market and undercutting their ethical rivals.
What does the document say?
Over the past few years, the Government has implemented several pieces of legislation aimed at unethical service providers, including:
- Changes to prevent travel expenses paid under salary sacrifice schemes counting towards the National Minimum Wage (announced in 2011).
- Action against the use of offshore intermediaries to avoid paying Employers’ National Insurance Contributions (2013).
- Measures taken to prevent ‘false self-employment’, particularly in the construction industry (2013).
However, a minority of umbrella providers always seem to find new ways to circumvent the prevailing tax laws.
This latest document, “Employment Intermediaries: Temporary workers – relief for travel and subsistence expenses”, discusses the use of overarching contracts of employment (OACs) by umbrella firms and employment agencies to exploit travel and subsistence rules for tax purposes.
These contracts are used to place workers on multiple projects at the same time – but under the terms and conditions of one single contract of employment.
OACs are legitimate business arrangements – used commonly in many industry sectors, but some umbrella providers have misused these structures to allow their workers to benefit from tax relief on their home to work travel expenses.
How does this latest tax dodge work?
Ordinarily, normal employees cannot reclaim the cost of travel between their home and workplace. However tax relief is available on travel to a ‘temporary’ workplace.
A temporary workplace is one which will last for no more than 24 months. If the employee is aware that they will be working at the temporary workplace for the entire duration of their employment, then no tax relief is available.
However, as an OAC provides a ‘single employment relationship’ which spans any number of separate engagements, the temporary workplace restriction no longer applies, and each workplace can be treated as temporary.
As a result, an agency worker employed by an agency for a six-month assignment under an OAC could theoretically claim tax relief on his travel and subsistence expenses, but a worker employed on a standard contract of employment could not.
Shockingly, some intermediaries go one step further and swap a reimbursement for travel and subsistence expenses for a reduction in salary by the same amount, thus reducing the employer’s NIC bill.
These practices, which cost the exchequer an estimated £400m per year, could now be outlawed – possibly as early as Budget 2015.
Reaction from the umbrella industry
Having expressed his concern following the Autumn Statement that ethical umbrella firms may be unfairly targeted by blanket measures aimed unscrupulous providers, Rob Crossland, chief executive of Parasol, welcomed the document. He said that the tone was “on the whole – sensible, proportionate and rational.”
Levelling the playing field
The document acknowledges how unscrupulous umbrella companies have distorted the market in their favour, enabling them to pay their workers the same as ethical providers, but at a lower overall cost to the end-client.
Crossland believes that this point is a very important one. The legislation “could create the level playing field that we have spent years campaigning for.”
“I said after the Autumn Statement that this review could be a breakthrough moment in the evolution of our sector, and this document has reinforced my impression.
“It’s refreshing to see some acknowledgement of the fact that professional, compliant providers offer contractors genuine employment rights and support.
What happens now?
Industry players have until 10th February 2015 to respond to the HMRC document. The Government says the feedback will be “used to inform firm action at Budget 2015.”