Travel and subsistence deductions – for agency and other workers paid through intermediaries

Posted by David on December 15, 2015
Expenses and benefits, HMRC, News articles, Status / Comments Off on Travel and subsistence deductions – for agency and other workers paid through intermediaries

On 9 December 2015 HMRC published its detailed proposals and draft PAYE legislation (with equivalent NIC legislation to follow), which would place significant limits on expenses claims made by workers paid though employment agencies and similar structures. The proposals are expected to take effect from 6 April 2016.

How does the new legislation work?
In principle the change is disarmingly simple, and will now deem that each engagement of the worker, by the employment agency etc., is regarded as a separate employment.

Since 1998, legislation has deemed that if substantially the whole period of an employment is performed at a single place, then any travel (i.e. from home or another private location) in order to get to or from that place, is ‘ordinary commuting’ i.e. non-allowable.

However employment agencies have often argued that a worker, albeit ‘moved’ from one period/place of client engagement to another period/place, is employed on a single overarching contract of employment by the agency. If this argument succeeds, substantially all of the employment is not performed at a single place and hence any such travel to reach that place is to a ‘temporary’ rather than permanent workplace i.e. an allowable journey. The new legislation therefore expects to defeat this argument, by ensuring that each client engagement will be considered separately as if it was a stand-alone employment.

It is HMRC’s view that some workers of employment businesses are currently able to enjoy ‘unfair’ tax deductions. Also it is perceived that in many such cases the ’employer’ (or paying business) retains most of the benefit of this. Indeed it seems HMRC may possibly regard many ‘umbrella payrolls’ as adding little or no true commercial value, beyond generating income for themselves at the expense of the Exchequer (i.e. typically by charging a fee to the worker in return for arranging payment of ‘tax free’ expenses). The new legislation therefore seeks to remove any such perceived unfair tax/NIC advantages.

Which workers will be caught under the new legislation?
As a minimum:
– An individual (worker) must personally provide services. There will be some situations where personal services are demonstrably not provided; however it will be assumed most agency workers do provide their services personally, and the onus would be the parties if they wish to show that this test is not met.
– The personal services must be supplied to another person (the client).
– However any direct contract between the client and the worker would be excluded, hence the arrangement must involve an ’employment intermediary’ (such as an employment business or agency) being contractually placed between worker and client.
– The new rules do not however apply if the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control, i.e. by any person. HMRC is known to interpret these tests both widely and stringently, and again it must be assumed the onus would be very much on the parties to prove that this test is not met.
– Work undertaken wholly within the client’s home is also excluded (this is a factual test).

One chink of light is that the draft guidance does accept that secondment of a worker from one place to another within the same engagement would potentially still be regarded as a move to a temporary workplace (assuming that secondment was for 2 years or less). Whilst there may be certain limited circumstances where this exception might apply, we imagine it would be difficult for an agency to ‘manipulate’ the length of a particular engagement in order to seek to take advantage of the ‘relaxation’. In practice most engagement periods are for a finite period and are determined by factors outside the employment agency’s control i.e. they are based on the client’s requirement primarily.

What about Personal Service Companies (PSCs)?
PSCs are themselves an ’employment intermediary’, and hence the worker supplied by the PSC is also potentially caught under the rules. However the draft legislation confirms the Government’s intention, as outlined in the Chancellor’s recent Autumn 2015 statement, that the PSC will have to be within ‘IR35’ to also be caught within these new travel restrictions.

In simple terms the ‘IR35’ legislation applies if the worker would be an employee of the client but for the interposition of the PSC. At present the large majority of PSCs regard their contracts as outside of IR35 and, if this is correct, then the PSC will not be caught by the new restrictions. However HMRC is currently considering consultation responses on the extent to which the IR35 rules should themselves be overhauled. Whilst HMRC sources have recently indicated that no hard and fast decisions (on IR35 changes) have yet been made, it is very much a question of ‘watching this space’.

As a PSC structure will only have to consider the new travel rules if they are also caught by IR35, another potential stumbling block is how precisely to define a PSC? In most cases a PSC will be self-evident i.e. a company owned and run by one man or woman; however for instance the structure and ownership of jointly run businesses may have to be looked at more carefully. In general the IR35 legislation (Section 48 et. seq. of Income Tax (Earnings and Pensions) Act 2003), is drawn widely to include as many businesses as possible within its definition of a PSC for this purpose. However paradoxically, in the context of the new legislation, IR35 may prove to be an excluding factor, i.e. if you are defined as a PSC but are outside of IR35, you are also outside of the new travel rules.

When might the new proposed ‘transfers of debt’ rules apply?
In common with other ‘anti-avoidance’ legislation, the new rules propose that unpaid PAYE debts can be transferred to other relevant parties. This follows a pattern initially established with the 2006 rules applicable to ‘Managed Service Companies’, as well as the 2014 legislation seeking to prevent the payment of agency workers on a ‘falsely self-employed’ basis, or being paid via ‘offshore’ companies where work has been undertaken in the UK. Briefly the new transfers of debt proposals are that:
-PAYE/NIC due on any taxable travel expenses would in the first instance be sought from the employment intermediary which paid those expenses.
– However if those duties remain unpaid, the debts may be transferred to any director of that employment intermediary, by means of serving a ‘personal liability notice’.
– As mentioned, if the IR35 rules apply to a PSC then so will the new travel rules. If in this event the PSC fails to account for the PAYE/NIC on taxable travel expenses, the debts may be transferred to the director(s) of the PSC. Presumably such a PSC may have also failed to recognise and properly apply the IR35 rules themselves; hence the business will face a challenge on more than one front.
– If there is evidence that a ‘client’ (i.e. the end user of the worker’s services) has fraudulently colluded with the intermediary i.e. by providing false evidence that the worker is not subject to supervision, direction or control, then debts may be transferred to the client (and in turn, the client’s directors if the debts remain unpaid). Whilst in practice a client will no doubt wish to determine the actual extent of supervision, direction or control of each worker, on an individual basis, under the new regime they would be unwise to share that process (formally or informally) with the Agency without extreme caution.

If you require any further information on these proposals, or indeed other ’employment intermediary’ obligations including the proposed IR35 overhaul, please contact ET4B.

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What next for salary sacrifice following the ‘Reed’ case?

Posted by David on August 26, 2015
Expenses and benefits, Flexible Benefits, News articles / Comments Off on What next for salary sacrifice following the ‘Reed’ case?

At the end of July (2015) the Court of Appeal heard, and rejected, an appeal by Reed Employment plc (“Reed”), against a nine-figure assessment of arrears of PAYE/NIC by HMRC.

For anyone unfamiliar with this potential landmark case, Reed had paid its temporary employees partly in salary and partly in tax free travel expenses, ostensibly implementing a ‘variable’ salary sacrifice so that PAYE/NIC would apply only to the lower salary element. HMRC took the view that no genuine alteration to contractual salary had ever been made, hence PAYE/NIC applied to the full original contractual sum. This view was supported by both the First Tier and Upper Tribunals.

In also agreeing, the Court of Appeal highlighted the absence of any clear unequivocal statement, by the employer to the employee, that the employment contract had been changed (i.e. in any way that the employee could be said to have understood, much less agreed to, the change). For example an employer statement that there will be a ‘small reduction’ to the employee’s gross pay was seen as at best ambiguous, and could not override the ‘clarity’ of the main contract’s terms.

The Court of Appeal also accepted the earlier Tribunals’ decisions that dispensations previously issued by HMRC were not relevant in this matter. In short, Reed had previously agreed with HMRC as to what circumstances a payment of tax free expenses could be made; however it was felt to have not also explicitly agreed the salary sacrifice methodology with HMRC.

Whilst the suggestion that Reed had not made ‘full disclosure’ in discussions with HMRC seems harsh, in our view the courts were correct in regarding the ‘salary sacrifice’ and the payment of expenses as two completely separate steps (i.e. if the two operate in conjunction, then the salary sacrifice must always come first). If the salary sacrifice does not work in the first place, any subsequent payment of ‘expenses’ would be considered as mere window dressing on the payslip and would be ineffective for tax/NIC purposes. The 1960s tax case of Heaton v Bell established the premise that there must be more than a mere payslip deduction, to effect a true contractual change.

Are statutory changes to salary sacrifice rules likely?
There has been speculation (following some rather vague government announcements recently) that there will be a general attempt to ‘outlaw’ salary sacrifice in future. ET4B certainly does not see this as a simple matter and therefore happening in the short to medium term. There are a vast number of different scenarios to consider, such as the employer which automatically applies a supposedly ‘invisible’ tax free benefit in addition to salary (e.g. as in the case of most Civil Service pension contributions), employers which provide and quantify tax-favoured benefits but don’t permit them to be altered by the employee, employers which automatically ‘opt-in’ employees to receive specific benefits (e.g. stakeholder or other occupational pension contributions) unless the employee ‘opts-out’ directly, employers which operate a full flexible benefits package, and employers which allow individual employees to opt for salary sacrifice in conjunction with tax-favoured benefits (e.g. employer sponsored childcare) merely on an ad hoc basis. Arguably there is no fundamental difference between each of these schemes; merely that larger employers tend to be slightly more sophisticated in the way in which they are able to demonstrate and agree revised terms with staff.

What we will very probably see is that specific arrangements, which HMRC is known to ‘disapprove of’, will continue to be challenged actively. For example it is expected that employee travel expenses, if paid in direct conjunction with a salary sacrifice agreement, will be excluded from the proposed statutory exemption for allowable expenses (planned to be introduced in April 2016, to replace existing employer dispensations for allowable expenses).

What steps should be taken now?
The Reed case provides another timely reminder that basic principles should always be followed when implementing or reviewing salary sacrifice or flex schemes, i.e.:

  • Is the contractual change legally effective? As Reed has found, this question is particularly important if an employee is included ‘automatically’, so that the employee cannot be said to have signed up to the scheme directly. Annual employee ‘total reward’ statements can often help, but in some cases can indeed hinder, this process.
    ET4B has noted that many salary sacrifice schemes (worryingly, including many of those drafted by the Big-4) do not appear to address this basic principle fully. Rather than explaining to employees exactly how a salary sacrifice will operate, we have seen extremely vague wording which is no more than saying ‘we [the employer] will decide how much your salary sacrifice will be each month’. The Reed case reminds us that a mutual and clear ongoing agreement is needed with the employee, before an employment contract may be regarded as altered.
  • Payroll calculations and operation of ‘notional pay’ e.g. as regards overtime, bonuses, increments etc., must also be thought through, and payslips must be able to cope if there are multiple sacrifices.
  • Treatment of leavers, staff on long term sick, and maternity leave etc. should be considered. There may well be employee rights at those times, as well as ongoing employer costs to consider.
  • Exclusion of certain employees should be considered e.g. those close to or below Minimum Wage or NIC Lower Earnings Limits.
  • Finally, is any tax clearance from HMRC comprehensive and effective i.e. is it specific to your own organisation and has it been achieved by putting all your cards face up on the table on a full disclosure basis?

In this complex area, choosing the right specialist adviser to review or implement your scheme may mean the difference between having confidence in a robust and watertight arrangement, and nervously awaiting the next knock on the door from HMRC.

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ET4Bs Spring 2012 Newsletter

Posted by David on May 01, 2012
Expenses and benefits, HMRC, National Insurance, News articles, Payroll, Status, Termination Payments / Comments Off on ET4Bs Spring 2012 Newsletter

016B_ET4B Spring 2012 Newsletter

This Newsletter contains  details of HMRC’s recent ‘IR35’ update, information on a recent stark reminder for employers operating salary sacrifice arrangements without adequate HMRC clearance, and much more.

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ET4Bs Autumn 2011 Newsletter

Posted by David on November 01, 2011
CIS, Expenses and benefits, HMRC, National Insurance, News articles, Payroll / Comments Off on ET4Bs Autumn 2011 Newsletter

015_ET4B Autumn 2011 Newsletter

This Newsletter provides an update on the RTI proposals, VAT on salary sacrifice, third party benefits and much more.

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