A recent Treasury consultation could result in some major changes in tax-free travel expenses which could affect all temporary workers.
Over the last few years, the Government has increasingly been forced to prove itself more and more in adapting to, and addressing, the various solutions available in the marketplace for those individuals with a questionable employment status, or whose personal service companies were vulnerable to an IR35 challenge. The Treasury has recently released a consultation document which, if implemented, could not only close down a number of current solutions but could also, and perhaps inadvertently, affect many other people who work as temps through agencies.
One of the more widespread solutions being marketed, relied on the use of dispensations to make tax-free payments to employees. In simple terms, a company (which may well have been an umbrella company or a managed service company) would take on and employ, under the PAYE system, workers who would have a series of contracts for work via that company. There would be an overarching contract of employment which would cover all the different contracts on which the employee worked. Each location, at which the employee worked, would count as a temporary place of work, as it was not a permanent place and was of a temporary duration never exceeding 24 months. Where there was an overarching employment contract, the rules regarding temporary places of work and fixed term contracts were neatly sidestepped. Once classed as a temporary workplace, the employee was eligible to make a claim for travel expenses from their home to that temporary place, together with subsistence and other similar claims. As these claims would attract tax relief under s336 ITEPA 2003, the employer was able to apply for a dispensation from HM Revenue & Customs (HMRC) that permitted these payments to be made free of tax with no reporting requirements, either on form P11D or on a Self Assessment Return. These arrangements allowed employees to potentially receive significant proportions of their “income” tax free, compensating for the employee NIC paid on their salary. The corresponding need to pay a lower salary (and less employer NICs thereon) resulting in savings which the employing company could use to attract business.
For some time now, however, HMRC has been concerned at what it saw as abuses of the arrangements. Very often, dispensations would be obtained by the employment agency at the commencement of trading and then used to cover payments to many more employees than HMRC was aware of, often in circumstances which differed from those under which the dispensation was originally obtained. Documentation and paperwork to demonstrate that the expenses were genuinely incurred, or that travel had actually taken place on specific dates, was often absent. In the most extreme examples, employees who had previously received a salary of, say, £500 per week would be paid a revised salary by the agency of £300 each week with the other £200 being paid as tax-free expenses – regardless of what work was carried out by the employee.
HMRC has been hampered by the dispensation system, which operates on a grant now-check later basis, as there are insufficient resources to adequately police the system. The transfer of debt provisions do not currently apply here, so some businesses identified as paying dubious expenses have simply closed their doors and walked away from the problem. It is understood that HMRC would like to make an example via a criminal prosecution of any such cases, but to date this has not happened.
The proposed Treasury solution to this problem is simple, but drastic. Where an employee works on a series of unrelated engagements, but under one overriding employment contract with an agency, then legislation would be amended so that tax-free travel and other related expenses could no longer be claimed and the engagements would be treated as self-contained, with each engagement being treated as a fixed-term contract. This would remove the tax saving and make the business model, which relies on dispensations, uneconomic. Care will need to be taken, however, to ensure that those employees working through traditional employment agencies, rather than umbrellas and managed service companies, are not affected.
All employment agencies and payment processing agencies, and those businesses that use agencies to pay staff (particularly if they are aware that dispensations are a feature of the arrangements), need to be aware of the proposals. Although this is, at present, a consultation, it seems likely that they will subsequently be implemented in a form not too dissimilar to that suggested now.
Peter Davies can advise and assist any business or employee affected by the above issues. To contact Peter, please enter your details and submit the online form below.