Travel & Subsistence tax relief (umbrella workers)

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.

The actual legislation can be found here , and the relevant section is as follows:
(5) “Relevant salary sacrifice arrangements”, in relation to an employee to whom an amount is paid or reimbursed in respect of expenses, means arrangements (whenever made, whether before or after the employment began) under which—
(a) the employee gives up the right to receive an amount of general earnings or specific employment income in return for the payment or reimbursement, or
(b) the amount of other general earnings or specific employment income received by the employee depends on the amount of the payment or reimbursement.

Ship Shape is aware that some umbrella companies are claiming that they have conducted an ‘SDC test’ of some sort, determined an umbrella worker is not under SDC and are therefore paying expenses under the traditional umbrella model. This action will result in a liability and penalty initially for the employer – the umbrella company itself.  If the umbrella simply disappears or operates at break-even such that any liability simply folds the business, its likely under Targeted Anti Avoidance Regulations (TAAR) that the Directors of the umbrella company will be pursued.  If the TAAR route is either not pursued or does not bear fruit, 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 these arrangement workers would be paid a steady income and agreed expenses up would be paid separately and on top of the steady income. 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 the Directors of the agency 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.