Tax Charity Critical of Umbrellas

New report targets PDPD Umbrella schemes

The Low Incomes Tax Reform Group (LITRG), a group that lobbies the government and HMRC to simplify tax rules and services for those on low incomes, has recently produced a report titled, ‘Travel expenses for the low-paid – time for a rethink?’. Its purpose is to “shine a light” on the use of particular umbrella arrangements by low paid agency workers that whilst considered non-compliant by HMRC, continue to be widely in operation.

Current legislation does not allow temporary workers to claim travel expenses thereby putting them at a disadvantage, particularly when they are performing the same work as someone in continuing employment who may be able to claim tax relief. Enter the Pay Day by Pay Day (PDPD) umbrella model to bridge that gap. However, whilst they may appear to be the low paid temporary workers salvation, they have, according to the LITRG, made matters worse for that group.

Umbrella companies provide a framework within which an agency worker’s successive work locations can be turned into ‘temporary’ workplaces for the purposes of obtaining tax relief to their travel expenses under “outdated” rules. These arrangements, says the report, are controversial as to some they are not within the spirit of the law whilst others see them as nothing more than an outright tax advantage. Nevertheless, PDPD’s have continued to thrive, making up around 37% of firms offering umbrella schemes.

In 2011, in a bid to address the effect of some of the more cavalier operators on agency workers, National Minimum Wage (NMW) legislation was introduced that essentially put an end to umbrella schemes as a means of engaging the low-paid. This however was not wholly effective as other schemes were dreamt up to get round the NMW issue, including one based on traditional umbrella arrangements – the PDPD. This claims to comply with the new NMW rules but still help workers make savings, with tax and NIC being applied to the workers net (after expenses) income. This essentially results in non-reimbursed travel expense relief being administered at source by the umbrella company, supposedly checked by reference to the employee’s actual expenses pay period, thereby giving birth to the name Pay Day by Pay Day.

More often than not the PDPD will deduct a fee from the worker’s pay for operating the scheme, in addition to benefiting from paying reduced employers NIC.

Despite HMRC publishing two statements warning that such schemes were non-compliant and also a subsequent court case, there has been inertia in attacking the schemes. There are some supporters of the schemes who would be not be too concerned in any case, as they are convinced the arrangements are legitimate. Ultimately therefore this may be a matter for the courts to rule upon.

Whilst the legality of PDPD schemes make using them risky, there are many reasons why low-paid workers use them. Some are unaware of the problems with PDPD’s or how they operate, whilst others feel they have little choice but to use them. Yet getting involved with such schemes can see the workers being pursued later for underpaid tax by HMRC, which is unacceptable. If HMRC consider these schemes to be non-compliant then they should be addressing and tackling the source of the problem, i.e. the PDPD employer.

Ultimately, the LITRG would like to see HMRC build a case against a PDPD provider so that the model can be tested once and for all and some certainty created. That may not be necessary however if the travel expenses rules were to be overhauled so as not to work against low paid agency workers. The current consultation, ‘Travel & subsistence review’, due to close on 31st January 2015, could help establish a new set of principles to bring about the necessary change.