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.