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Not unsurprisingly there is come concern among the compliant umbrella companies that their business model might be caught up in the net aimed to catch the 'rogue' operators.
Shout99 has asked our resident expert on tax expenses and umbrella companies, former HM Revenue and Customs inspector, Bob Jones for his thoughts on the latest developments.
Bob Jones writes:
HMRC has produced a consultation document on the future of umbrella companies as they perceive them as being set up with the intention of exploiting the temporary workplace travel rules that were introduced as from April 61998.
If we look back at the legislation which existed prior to that date, relief was limited to travel whilst in the performance of the duties of the employment.
There was a non-statutory relaxation where a person had a 'normal' place of employment and visited another workplace for a temporary period provided the person return to the 'normal' place of employment.
This was generally referred to as detached duty and the amount of relief available was calculated on a triangulation basis with the three points of the triangle being home, normal place of employment and temporary workplace. That legislation had been written in the middle of the 19th century and remained unaltered for nearly 150 years. It didn't reflect 20th/21st century working practices hence the new legislation.
Umbrella model
It never crossed the mind of the person who wrote the legislation that somebody would dream up an 'umbrella model' and it was about 12 years ago when, as an HM Inspector of Taxes, I first came across the umbrella model.
The general principle is that if a person works direct for one employer at one location that location will be a permanent workplace and there will be no relief for travel expenses.
It follows that if a person has a series of temporary jobs with the job being at one location (even if the location is different) each workplace will be permanent.
If we introduce into the equation an agency and the same person obtains the same jobs it is generally accepted that each engagement is separate and distinct and as such each workplace is permanent so again there will be no relief for travel expenses.
However, if you then introduce an umbrella with the employee being engaged on an overarching contract of employment (and doing exactly the same series of jobs) the travel expenses become allowable.
What we have is the situation becoming more removed from a straightforward employer/employee relationship where there is no relief for travel expenses to a situation where although the person does exactly the same work the travel expenses are allowable.
Comparison
HMRC will argue that the legislation was never intended to grant tax relief under these circumstances and that is undoubtedly true.
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However, it depends how you look at it - for example, I am an employer, I have one business premises where everybody works and I employ 10 people. I need some temporary labour for a period of three months to cover a busy time, I approach an agency who send two additional members of staff for that period and, provided they work through an umbrella, they are entitled to claim their travel and subsistence.
HMRC perceive that as being unfair on the 10 permanent staff who are unable to claim travel or subsistence.
However, compare that with this - I am an employer and I have 10 members of staff who I send to temporary workplaces on a regular basis. Those members of staff are entitled to tax relief on their travel and subsistence.
I need another two members of staff for a period of three months to work at one location and I advertise in the local press - those two employees will not be entitled to their travel expenses.
Similarly if I engage the workers via an agency without the involvement of an umbrella they will not be entitled to their travel expenses. The use of an umbrella, under these circumstances, will mean that the travel and subsistence expenses are likely to be allowable and it brings them on a par with the permanent members of staff.
Under those circumstances it is the temporary staff who are potentially being disadvantaged so it really depends from which angle you approach the problem.
The comparison is between temporary workers and permanent staff and without doubt there are circumstances where the use of an umbrella gives the temporary worker an advantage over permanent staff but equally there are circumstances where, without an umbrella, it is the temporary staff that would be disadvantaged.
Principle
I said earlier that there is a general principle that if a person works for one employer at one location that location is likely to be a permanent workplace. The intention of the legislation was to grant an allowance for travel and subsistence to the employee who within one employment worked at a variety of locations.
The employee must attend different locations or there has to be an expectation that the employee will attend different locations or it has to be likely that the employee will attend different locations or it has to be reasonable to assume that the employee will attend different locations.
If an employee works at one location for one employer tax relief will not be available unless the employee can demonstrate that a move was likely but didn't actually happen. That can often be difficult to prove. The problem these days is that there are so many umbrellas. A few years ago it would be quite common for a person to stay with an umbrella and work at a series of locations. The fact that there are many more umbrellas means that many more employees are working with one umbrella at one location before moving on to another umbrella. That on its own is an indication that the travel allowances not due even though the umbrella is likely to pay the travel expenses without deduction of tax.
Compliant
I work very closely with the HMRC specialist office in Edinburgh that deals with dispensation applications in respect of umbrellas.
In order for an umbrella to qualify for dispensation HMRC must be satisfied that there is no loss of tax to the Exchequer and this is a lengthy process as applications are looked at in great detail.
I will work with umbrellas which aim to be totally compliant with legislation. I will not work with umbrellas which do not comply with the law and therein lies a great problem.
It is impossible for a compliant umbrella to compete with umbrella that does not comply with the law and personally I feel that HMRC should be focusing their attention on the non-compliant umbrellas to allow those who wish to comply with law to be able to compete fairly with one another.
This is not the first consultation document on umbrellas. The previous one was around 2008 and it was decided by HMRC that HMRC should concentrate their efforts on making umbrellas comply with the law. In the last six years, although HMRC assure me that a number of umbrellas have been closed down, they do not seem to have made a great deal of progress as there still appear to be a good number of non-compliant umbrellas in existence.
Bob Jones
The full discussion document is available here: Employment Intermediaries: Temporary workers – relief for travel and subsistence expenses - Discussion document, Dec 2014.
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Susie Hughes © Shout99 2014
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