The benefit of allowing workers to benefit from tax relief on travel and subsistence expenses as part of an umbrella contract was removed with legislative change to the Income Tax (Earnings and Pensions) Act 2003, section 44, in April 2016.
Whether supervision direction or control (SDC) exists or not, section 289A 5(b) of the Finance Act makes it illegal to have arrangements whereby employees’ taxable income fluctuates as a result of claimable examples. This outlaws the standard umbrella practice of reimbursing taxable expenses tax free, with the remainder paid as taxed PAYE income.
As industry experts, we know that some umbrella companies claim to have conducted an ‘SDC test’, determined an umbrella worker is not under SDC and are therefore paying expenses under the traditional umbrella model.
This will result in a liability and penalty, initially for the employer – the umbrella company itself.
If the umbrella then disappears or operates at break-even so that any liability folds the business, its Directors are likely to be pursued under Targeted Anti Avoidance Regulations (TAAR).
If that doesn’t happen, HMRC can use the Intermediaries legislation and pursue the intermediary closest to the end-hirer – the agency.
There is a model and a legal argument for “fixed” or “agreed” expenses being allowed for umbrella workers not under SDC.
Under this arrangement, workers would be paid a steady income and agreed expenses are paid in addition.
This arrangement should be based on Tax Counsel being in place and a solid commercial argument, other than tax. Otherwise, it will give rise to successful charges for missing taxation under either the Finance Act or TAAR.
Again, should the HMRC be unable to reclaim a successful claim for liabilities from the umbrella company or its Directors, it may choose to pursue the agency under Intermediaries legislation.
In either case, should agency Directors be seen to be knowingly using an umbrella company to pay their workers incorrectly, to minimise taxation and costs, they could also be pursued under TAAR.
We believe an agency should have visibility of how the supplying umbrella is operating not just in principle, but through audit.
The agency should have visibility of the payslip of every worker, compliance documents and the contract between the worker and the umbrella company – on a “live” basis – to be confident there is no liability accruing below them.
The law on preventing illegal working is set out in the Immigration, Asylum and Nationality Act 2006.
Under section 15, an employer may be liable for a civil penalty of up to £20,000 per worker that does not have the right to do the work. More serious cases may incur a criminal conviction, jail sentence or unlimited fine.
Employers must carry out prescribed document checks pre-employment to prevent illegal working. Where workers have time-limited permission to work in the UK, those checks should be repeated. Since 2014, changes have simplified the civil penalty scheme and changed the document checks process in some ways.
Under this legislation, umbrella company Directors are most at risk. However, previous high profile cases have publicly named both the recruitment agency and their end hirer client.
We achieve peace of mind for both the agency and client through visibility of the supply chain procedures and documentation such as ID.
Our clearly defined service prevents clients from suffering heavy financial liabilities under AWR.
Regulations force contractors and agencies to provide agency workers with access to basic employee facilities and work opportunities on day one of their assignments. After 12 weeks in the same job, agency workers are entitled to the same pay, overtime, annual leave and discretionary leave as comparable direct employees.
We make sure clients and agencies are informed on meeting AWR rules with, for example, statements of pay rates, employment status, length of employment and time since last employed by the same client. We also identify any workers approaching 12 weeks at risk of being paid less or working under less favourable conditions than comparable direct employees.
Where this happens often, we can propose simple policy adjustments in line with AWR.
As the first party in the employment chain, we would be liable in the unlikely event that charges are raised. As a UK company with UK directors and all assets held in the UK, we would defend, defeat or pay the charges.
We do not promote or facilitate the use of limited companies.
Where an operative is subcontracting through a Limited Company, we can however make sure the structure is legitimate, eliminating the possibility of any charges or debt transfer.
In each case we establish that there is no managed service provider involved, that they themselves are not a MSC provider, that the operative has set up his own Limited Company, understands what it is to be a company director, has his own accountant, a company UTR and bank account (and Company CIS registration if required).
In the unlikely event that charges are raised, HMRC will first charge the Limited Company, then us before approaching the end client.
As a UK company with UK directors and all assets held in the UK, we would defend, defeat or pay the charges.
Ship Shape collects contractual and factual information to establish that workers fall outside of IR35 and that there is no mutual obligation, substitution rights, and risk, for example.
We have successfully defended IR35 status in HMRC reviews in 2009 and 2012.
We’ve adapted our compliance questionnaires and record keeping to justify self-employment under the previous IR35 rules, managing compliance efficiently and effectively with the new SDC legislation.
The 2014 Onshore Intermediaries legislation, designed to help prevent false self-employment amongst agencies workers and increase the PAYE tax revenue to the treasury in the face of the growth in self-employment, introduced the concept of ‘Supervision, Direction or Control’ (SDC). This places most agency workers under SDC and prevents them from contracting as self-employed when under SDC.
Stringent new reporting (Intermediaries Reporting) was also introduced to allow HMRC to easily identify which intermediary workers were contracting as self-employed.