Travel and subsistence: It’s robbery

The taxman is claiming that Umbrellas are trying to steal from him, but is it the other way round? Travel and subsistence: It’s robbery

HMRC is trying to reach the conclusion that overarching contracts of employment (OAC) are a form of underhand scheme designed by shady Umbrella organisations and other non-compliant employment intermediaries to avoid paying an estimated £400m in Income Tax and National Insurance.

There is no doubt that modern employment models have moved on since the original tax legislation was first drafted, but subsequent tax changes have simply not kept pace with current practice.

Nevertheless, for HMRC to contemplate removal of tax reliefs on previously acceptable expenses, which they introduced, based on an argument that too many people may be benefiting, is a poor argument that will not protect the interests of the vulnerable and lower paid.

Following the issue of a discussion document in December 2014 HMRC invited comment from stakeholders in the temporary labour market, to help the Revenue determine if some end hirers, agencies and Umbrellas, pressurise temporary workers to operate under OACs which in turn allows them to make claims for home to work travel costs that would otherwise be ‘normal commuting’ in order to reduce overall tax payable to HM Treasury.

What is really interesting is the reasons that HMRC have stated as to why they believe contractors should not be entitled to claim travel and subsistence from home to their place of work:

  • “It’s not fair” on other taxpayers who cannot claim, as these other taxpayers are effectively subsidising abuse.
  • “We want to level the playing field” and treat all taxpayers in the same manner
  • “Technically flawed planning schemes” being deliberate abuse especially of the vulnerable workforce.
  • “Because the Treasury wants to collect more tax” – to reduce public borrowing we could always collect more tax.

It seems most likely that if all of the reasons why HMRC want to change the rules are placed in order of importance, then the final one is the biggest driver and therefore highest priority, as they themselves confirmed. The remaining issues are the political justification for a very unpopular and ill-considered project.

Technical highlights

When a worker travels from home to their place of work, the primary assumption is that this is normal commuting and tax relief for the costs of travelling or subsistence is not allowable. However, legislation provides for an exception to this restriction if the travel is to a ‘temporary’ place of employment, rather than a ‘permanent’ one.

This ability (under certain circumstances) for the existence of an OAC to transform what would otherwise be a permanent workplace into a temporary one is what creates the tax relief for expenses.

Other types of workers not engaged under an OAC (permanent, or short term agency contracts), could sit next to an Umbrella worker, may make the same journey from home to the same place of work and are not able to claim tax relief for their travel costs. So there is a moral justification and a case for symmetry of treatment but that only carries weight if one assumes the risks, responsibilities and rights and obligations are also the same for differing types of worker. Which they are not…

HMRC wish to collect £400m more in taxation, remove this inequality, level the playing field and stamp out tax avoidance…and protect the vulnerable worker’s rights and income! (It is not disputed that within this figure some non-compliant business models exist, which rely upon an aggressive interpretation of how the tax laws should be applied. They may fail under anti-avoidance legislation and remain a legitimate target for HMRC.)

The alternative options suggested by HMRC to collect this tax are also open to comment and may even be extended to include personal service companies (PSCs). Today’s main targets seem to be Umbrellas and tax avoidance scheme users; tomorrow’s may well include an attack on the independence of PSCs and small businesses.

If we assume that the estimate of tax loss from HMRC is indeed correct at £400m and HMRC outlaw current tax avoidance models and legislate to make all travelling from home to work under OAC non tax deductible, who will be the losers?

Any increase in the tax take has to come from somewhere. Will contractors and temporary workers in general, but especially at the lower skilled end of the market, be able to afford this additional burden? Will they be able to pass it on to their employer (the Umbrella)? Will the Umbrella be able to pass it on (via the agency) to the end hirer?

Will UK plc be willing to pick up the costs of an extra £400m and in doing so accept this hit to their profits? If they do, the taxable profits of UK plc will fall by the same amount and reduce the tax they pay by approximately £84m…I’m not convinced.

Umbrella v Limited – what’s right for you? Understand your options and contract with confidence. Contact us  to discuss your options.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Umbrella company avoiding National Insurance

Umbrella company avoiding National Insurance

If my Umbrella company reduces my salary and increases my expenses to avoid National Insurance am I at risk?

If this is something that your Umbrella company is doing there is definitely a possible risk. If any expenses listed fall outside HMRC rules on what is allowable as a legitimate business expense you will be personally liable for any unpaid tax owed. Even though you are an employee of the Umbrella you are still personally responsible for your tax, so it will be you who will have to pay any additional tax due. This is true even though the expense calculations have been done by your Umbrella company on your behalf. These amounts can also be chased by HMRC in later years. So, if the expenses portion of your salary looks un-naturally high, it is serious cause for concern.

Many Umbrella companies have been granted what is known as ‘dispensation’ by HMRC. A dispensation allows an Umbrella to apply standardised amounts to specific expense items eg: £21 per day for subsistence. The Umbrella will then apply these expense items and set scale amounts to your net pay calculation. Under the dispensation the Umbrella does not have to supply receipts for these either, which makes administration easier for them. Do remember this is not a “blank cheque”, as a general rule you do need to be aware of claiming only what you spend, and ensure you only claim the subsistence amount when you’ve actually spent something. However, it is in your interests to keep complete records of your own, as receipts would be required in the event of an HMRC inspection. Some Umbrella companies have unfortunately pushed the limits of their discretion under their dispensation agreement a little too far. This pushing of boundaries is where problems in this area start.

What can I do about it? Does the Umbrella company have to tell me if they are being aggressive or downright dodgy?

The Umbrella company has an obligation to explain to you all amounts appearing on your payslip. Ideally it should be able to explain the basis of your expenses calculation and also be able to reference the relevant HMRC guidance. Some companies supply online pay calculators, but be aware that these are only as accurate as the information supplied. Some only ask for basic information which may not produce an accurate figure. The simplest pay calculators are often based on averages and can be used only as a guide.

If your Umbrella company is not supplying satisfactory answers to your queries the best course of action is to contact another independent adviser and get answers to your questions. They can also review your overall circumstances and confirm if using an Umbrella remains your best option. This way you are protecting your interests by nipping potential problems in the bud.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Osborne rules out NI/income tax merger

Osborne rules out NI/income tax merger

THE ELEPHANT IN the room of tax simplification is trumpeting. The merger of National Insurance and income tax seems to be a possibility, according to the nationals.

But, in fact, chancellor George Osborne all but ruled out a full integration of the systems yesterday. Indeed, his limited scope even caused John Whiting to express his disappointment.

Crucially, Osborne said that he is “not proposing we extend National Insurance to pensioners, or to other forms of income, or that we abolish the contributory principle”. It is this final point that is the most salient. A full merger will have to include an abolition of the contributory principle, otherwise it remains National Insurance.

What Osborne has done is paved the way for an alignment of the systems – the same calculations, the same review period, maybe even a removing all the differences between reliefs applied to the systems. All these would be positive moves and would simplify the systems.

But the fundamental principle behind National Insurance – the contributory principle – will remain. And, as such, the possibility of complete transparency around our rate of tax will not happen.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.