Contractors Travel Expenses Under Threat?

HMRC issue discussion document regarding temporary workers travel expenses

Contractors’ ability to claim travelling expenses incurred whilst working at a temporary workplace could be under threat if a proposal contained in a recent discussion document is implemented.

‘Employment Intermediaries:  Temporary workers – relief for travel and subsistence expenses’ was published by HMRC last week with the aim to seek views on how to best to address the seemingly unfair advantages that working through an Umbrella company provides in comparison to other employers. The document comes hot off the heels of the announcement in the Autumn Statement that the government will now review the increasing use of overarching contracts of employment by employment intermediaries such as umbrellas. These arrangements enable workers to obtain tax relief for home to work travel that would otherwise not be available.

The government recognises that temporary labour plays an important role in the UK’s labour market but at the same time some of these workers are causing the Exchequer to lose around £400 million a year in revenue where they are plying their trade through employment intermediaries such as umbrellas.

Some steps that were supposed to address the misuse of travel expenses have not been particularly effective but the responses to this latest document will inform decisions for next year’s Budget, although the earliest any new measures would be introduced would be 2016.

Overarching contracts of employment

These are a legitimate form of employment contract used by some employment businesses and umbrellas, whereby temporary workers are placed on multiple separate work placements with various end clients but on terms and conditions of a single permanent employment.  The umbrella company becomes the employer and their address the permanent base location for the worker. Each separate work placement the worker undertakes is then treated as part of their permanent employment but taking place at a temporary location. This then enables the employee to claim tax and NIC relief for travel and subsistence expenses incurred between their home and the ‘temporary workplace’.

Contrast this with the position of those employees who are engaged under direct contracts of employment, be they temporary or permanent. Agency workers for instance, are unable to claim travelling expenses from their home to their place of work because each separate work placement is treated as a permanent employment contract in its own right and therefore each work location is treated as permanent.

There are some employment intermediaries, who use overarching contracts, that take the arrangements one step further and reimburse travel and subsistence expenses in return for a deduction in salary rather than refunding the expenses in addition to the workers’ salary. This effectively swaps pay that would have been subject to tax and NIC for reimbursed expenses that are not. This also has the effect of reducing the employment intermediary’s NIC liability. Some intermediaries even keep some of the employees’ tax and NIC relief for themselves!

Umbrella Fees

For the privilege of working through an umbrella company, the worker will usually be charged a direct fee which is deducted from the employees’ pay. Typically this will be around £15-30 a week or £70-120 a month. In addition employers NIC is also deducted together with a sum to be paid later to the individual as holiday pay.

Some umbrellas charge a sliding scale rather than a fixed fee.

Whilst then Umbrella workers may be able to pay less tax than an identical worker engaged under traditional employment arrangements, any financial benefit to the individual can often be offset by the administrative fees charged to them by the Umbrella.

Based on an analysis of a group of over 50 of the larger umbrella companies, the government found that for around a quarter of employees, the fee levied on them was greater than the travel and subsistence relief. More than one-tenth of workers, those being the lowest paid, have annual income and expenses below the NIC primary threshold and are therefore unable to claim significant or any travel and subsistence relief at all.

There is also a concern that many umbrella workers do not understand how or what exactly they are paid due to the complexity of the payslips they are provided with.

Evidence seems to suggest that the use of overarching contracts is on the increase. The number of workers engaged by over 50 of the larger umbrella companies increased by 50% between 6th April 2011 –  5th April 2014. By the end of 2013/14 these companies alone employed over 150,000 different individuals in the course of the year.

Solutions

The discussion paper offers two potential options for addressing this “avoidance” as follows:

Option 1

To amend the rules on travel and subsistence to deny relief for home to work travel for those workers engaged under an overarching contract of employment by an employment intermediary to work for a third party. This would work by classifying the end clients’ workplace as a ‘permanent workplace’. However, this could have a potential impact on Personal Service Companies (PSCs) and the government want to give careful consideration to unintended consequences to contractors before taking any final decision on the overall approach and how it is applied in these circumstances.

If PSCs were excluded from any changes, then the government believes there is a risk that employment agencies may encourage individuals to work through their own limited companies so as to obtain tax relief on home to work travel. However, this thinking ignores the disincentives created by IR35 and the Managed Service Company legislation. There are many freelancers who use umbrella companies because they are engaged under a contract that falls to be caught under IR35 and therefore an umbrella is the next best option.

Option 2

Preventing overarching contracts of employment being treated as giving rise to a series of temporary employments under a permanent contract. This option would specifically or solely affect people employed under such contracts but would have no impact on PCSs.

Some bodies have called for a levelling of the playing field by extending the availability of tax relief for travel expenses to agency workers who are not engaged under overarching contracts but the government have ruled this out, mainly because it would deplete the Treasury coffers

The full document can be found on the gov.uk website. Closing date for comments is 10th February 2015.