The Autumn Statement 2014 released some interesting proposals, not least of which was the announcement that the government would be reviewing the use of overarching contracts of employment (OAC) by employment intermediaries in the temporary labour market. Temporary labour plays an important role in the UK’s labour market, employing 1.7 million people (6.5% of all employees). However, evidence suggests that some businesses involved in this area of the market are avoiding employment taxes. So far, to address tax avoidance in the temporary labour market the government has already implemented the following:
- In 2011, the National Minimum Wage (NMW) rules were amended to prevent travel expenses paid under salary sacrifice schemes counting towards the National Minimum Wage
- At Budget 2013, government announced new rules to tackle the use of offshore intermediaries to avoid employment taxes
- At Autumn Statement 2013 the government announced rules to deal with onshore intermediaries used to facilitate false self-employment
Despite these initiatives businesses in this sector are still avoiding tax. Most recently it has been brought to the government’s attention that the use of overarching contracts by umbrella companies and employment agencies, who seek to use such contacts to exploit tax rules for travel and subsistence for temporary workers, are increasing. This is estimated to be costing the general tax payer £400m a year.
OACs are a legitimate form of employment contract used by employment businesses and umbrella companies to place temporary workers on multiple work placements. Through OACs creating a single employment relationship with the employee, who covers all of their work placements, it means that each of their workplaces is treated as a “temporary workplace” (so long as the individual is not there for more than 24 months).Therefore, OACs allows the individual to claim tax relief on their travel and subsistence expenses from their home to each “temporary” place of work. This tax relief is not available to a temporary agency worker engaged directly by an employment business, or to those who are directly employees by businesses using their labour.
However, whilst this may seem extremely advantageous to the employee this is not always the case. Some employment intermediaries using OACs take advantage of the tax relief through reimbursing travel and subsistence expenses in return for a reduction in salary, rather than reimbursing the expenses on top of the individual’s salary. This effectively swaps pay that would have been subject to tax and employee NICs relief for reimbursed expenses that are not. This also reduces the employment intermediary’s employer NICs liability at no extra cost. In some instances individuals engaged in OACs may also be charged administrative fees by their umbrella company, which means they do not benefit from paying less tax and are often in a similar, if not worse, position than an identical worker engaged under tradition employment business arrangements.
So, what is the government’s plan of action for combatting tax avoidance through OACs?
The government plans to level the playing field between businesses that misuse the tax rules and those that do not. They also plan on improving the information available to individuals so that they can make informed decisions when entering into OACs and therefore do not enter into arrangements that are not beneficial to them.
From 2016-17 the government is introducing a new tax exemption for certain expenses incurred by an employee and reimbursed by an employer. As a result, the employers will no longer have to complete P11Ds or apply to HMRC for the use of a dispensation. However this new tax emption will not apply if the payments are made through salary sacrifice schemes:
- The most common war for expenses to be paid instead of salary (rather than on top) is through salary sacrifices. However, from April 2016 this will no longer be possible as the government announced at the Autumn Statement 2014 that NICs relief will no longer be available on expenses that are given under a salary sacrifice arrangement.
National Minimum Wage (NMW) Enforcement
A NMW review of umbrella companies has revealed instances of workers’ pay including elements of reimbursed expenses, which should not be taken into account when calculating pay for NMW purposes.
Going forward deductions from a worker’s pay for an employer’s own use and benefit cannot bring a worker’s pay below NMW. These deductions include administration charges for handling transactions on entry to a travel scheme, payment of transport costs, uniform costs and the provision of third part insurance.
The Department for Business, Innovation and Skills is looking at how greater clarity can be delivered to bother employers and individuals, ensuring that both parties understand the full implication of OACs, helping to ensure that individuals will not enter into a contract that will have negative implications for them.
Tax Relief for Travel Expenses
The government is currently reviewing the tax rules for travel and subsistence expenses with the aim of modernising these rules to reflect contemporary practices in the labour market. So far they have two proposed options:
- Introduce legislation to amend the tax rules on travel and subsistence expenses. This would mean that individuals engaged under an OAC by an employment intermediary to work for a third party, cannot claim tax relief for travel, and associated subsistence, from their home to the workplace of the end client. One way to achieve this would be through recognising the workplace of the end client as being the permanent workplace in all cases. Therefore no travel or subsistence relief would be available.
- Restrict the availability of tax relief for travel from home to the workplace, and associated subsistence costs, where the individual is employed by an intermediary specifically under and OAC. This could be achieved through preventing OACs giving rise to a series of temporary “employment” under a permanent contract.
The above information forms HM Revenue & Customs’ (HMRC) discussion document, which seeks the views on the use of OACs. The discussion document is open until 10 February 2015; all responses will form decisions for Budget 2015, with the measures introduced coming into effect in 2016.