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Bob Jones writes:
HMRC are now imposing strict tests prior to granting dispensations in respect of umbrella companies and any company not meeting those requirements will simply not be granted a dispensation.
At this point I wish to stress that a dispensation simply dispenses with the need to submit forms P11D. A meal allowance, whether it be the benchmark scale rate or whether it is at an individually negotiated scale rate, is covered as a separate issue.
The days of dispensations and umbrella companies are numbered unless the strict tests now being imposed by HMRC are passed and even if the dispensation is granted umbrella companies will have to keep detailed records to monitor both the fact that an expense has been incurred and also that the journey qualifies for relief.
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We are all aware that an overarching contract is an essential element but it is no longer a matter of simply providing a copy of the contract in order to obtain the dispensation. HMRC have published internal staff guidance, extending to quite a number of pages, on the requirements that they must look for when examining what is claimed to be an overarching contract. HMRC is asking for a great deal of further information and is insisting upon the maintenance of records to prove that workplaces are “temporary workplaces” in accordance with the law.
It cannot now be assumed that an overarching contract automatically leads to workplaces being classed as “temporary workplaces” thereby qualifying for tax relief in respect of travel. HMRC expect that umbrella companies maintain records to prove that instances of ordinary commuting are identified and that mileage allowance is paid only in respect of journeys to/from temporary workplaces and/or travelling in the performance of the duties of the employment.
Benchmark and other scale rates
Umbrella companies in the past have been used to negotiating scale rates with HMRC and paying an amount without the need for the contractor to provide any documentation. A year or so ago HMRC introduced the benchmark scale rate which, over time, will replace most of the individually negotiated scale rates. At the time the benchmark rate was introduced it was simply a matter of informing HMRC that the benchmark rate was to be adopted.
This is no longer the case. Please read the following carefully.
HMRC have revised their guidance to staff. Even if an umbrella company pays the benchmark scale rate HMRC require the contractor to retain all documentary evidence in the form of either receipts or a contemporary note. HMRC require that the umbrella company performs a regular audit. Although the HMRC staff instructions refer to the audit they do so in general terms which are not particularly helpful. I have managed to negotiate acceptable terms of audit in individual cases and I think that is important to do this to avoid any future problems over interpretation.
I understand that some umbrella companies have decided that the imposition of the audit trail in respect of scale rates, benchmark or otherwise, may make the use of those scale rates less attractive and have decided to reimburse actual expenditure.
Other issues
It is clear that HMRC are looking at all aspects of umbrella operation and this is an area that has been identified by HMRC and is one that Umbrellas would do well to look at in depth.
The incidence of contractors working on one assignment/one workplace with one umbrella who then move on to another assignment and change umbrella is becoming more common. There will always be instances where, for whatever reason, a contractor works on one assignment/one workplace with one umbrella and the last time I looked at this point the percentage number of cases was relatively small.
If a person works for one employer at one workplace throughout the whole of the period of the employment that workplace is a permanent workplace and travel expenses are not allowable unless, of course, it was expected that there would be a move to another workplace and that move did not take place. Under those circumstances the onus is fairly and squarely on the employee/Umbrella to prove that throughout the whole of the period of the employment a move was expected but, at the last minute, it didn't take place.
HMRC are aware of the fact that more and more employees are moving between umbrellas working on one assignment at one workplace throughout. It won't be long before HMRC challenge the fact that umbrella companies are paying travel and subsistence expenses tax free under these circumstances and it will be up to the umbrella company to come up with the evidence.
Target
I was asked recently whether the travel expense rules introduced in 1998 would be targeted by the coalition government as an area of review. The previous travel rules had been in existence for about 140 years and had to be revised because they could not be applied to modern working practices. Although the new rules are not ideal they do provide tax relief for a large number of people, for example in the construction industry, who genuinely incur large amounts of expense.
An umbrella company, properly set up, creates a situation where travel expenses that would not normally be allowable for tax purposes become allowable. Personally I do not think that there will be any change in the legislation but it is clear from recent correspondence that I have had with HMRC that they will accept only those umbrellas that not only at the outset satisfy all the tests but also continue to achieve the required high standard of audit.
Bob Jones
Internet-Taxation
Training course
All this and more is contained within Bob Jones' course for umbrella staff and senior management.
For more information see:
Bob Jones launches training course for umbrellas (Shout99, May 2010)
or email bob.jones25@btinternet.com
or telephone 01244 310547 (quoting 'Shout99 report').
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Susie Hughes © Shout99 2010
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