For
several years we were vocally opposed to the appearance and
meteoric rise of third party service companies claiming to
save tax for temporary workers. Legislation in April of 2007
got rid of most of them, but many have reappeared and now
market themselves as ‘umbrella companies’.
Despite their extravagant claims, in most cases, these
companies cannot lawfully save you tax and it is our advice
that they are best avoided. If you want to use a limited
company, get your own. There are plenty of firms of
reputable accountants who specialise in this area. If you
want to operate under PAYE (i.e, have tax deducted at
source) you can work direct for an employer or an agency. If
you choose to work via an umbrella company, they will charge
you for the privilege, but if they operate lawfully, they
will not be able to save you any tax at all, when compared
to any other employer in the same circumstances.
While there are many variations on the theme, the commonest
ruse used by most umbrella companies is travelling expenses.
They will tell you that because you are an employee of
theirs, but work elsewhere, you can receive part of your
income, equal to your travelling expenses, tax free. What’s
more, they may well claim they have a dispensation from the
tax authorities which allows them to do this. They will tell
you there is a two year limit before which, you don’t need
to worry.
All
of this is wrong. Umbrellas trade on the confusion
surrounding travelling expenses and will argue erroneously
that a temporary workplace is the same as a workplace of a
temporary worker.
Rightly or wrongly it has been the law for many years that
the normal journey to and from work cannot be claimed as
business travel. Whether this is fair or not to temporary
workers is not the question. Neither is how much those
expenses are. A £2.00 bus fare is treated the same way as a
£100 flight. This is ordinary commuting. Only if during the
course of your employment, you work from a temporary
workplace, can any travelling expenses to and from that work
place be considered a legitimate business expense. These can
be paid free of tax and national insurance contributions.
The
same rules apply to temporary workers as everyone else. The
so called dispensation, is no more than an agreement with
the tax authorities that certain tax forms do not need to be
sent for each individual employee. It’s a dispensation
against sending in lots of forms. As for the two years, all
that means is that if you are working in the same place for
this amount of time and that place did otherwise qualify as
a temporary workplace, it definitely won’t after two years
is up. This is plainly not the same as saying if you are
there for less than two years, it is a temporary workplace.
Imagine the following scenario. You live in Watford and work
in the west end of London in a permanent job. Your fares are
£150 per month. You have to pay them out of your taxed
income. If your employer decides to pay them for you, you
will have to pay tax and national insurance on a gross
amount, that would leave a net amount equal to the cost of
your fares. In other words it is the same as being paid more
salary. Your employer can do this, but generally don’t. If
they like you, they give you a pay rise.
If
your employer asks you to work at a customer site for two
days per week, lets say in Birmingham, then yes, you can
claim your travelling expenses from Watford to Birmingham
and they are not subject to tax and national insurance
(subject to certain limits). Likewise, if you choose to
drive your own car to Birmingham you can claim mileage at a
specified rate and again not pay tax or national insurance
on those amounts (also subject to certain limits). This
would apply even if you were on a full time secondment to
Birmingham (which would become a temporary workplace) but
not after that situation had continued for two years.
If
you are a temporary worker at the same firm, contrary to
popular belief, the position is the same. If you did the
‘Birmingham job’ you could claim that element of travelling
expenses as legitimate business travel (as could anyone
else). However, if you stayed working in London, again, like
anyone else, you could not claim any travelling expenses
against tax for the journey from Watford to London, because
this is your normal commute. If your contract was for only
three months, it makes no difference. This is because while
Birmingham in the above scenario would be deemed a
‘temporary workplace’ London would be a single site for the
duration of the employment. The fact that it was only three
months is irrelevant. The point is, that during that three
months you were there, it was the only workplace you had, so
expenses getting there would plainly be not be to a
‘temporary’ workplace. This of course would also be true of
Birmingham, if that was your only workplace during the
duration of the contract.
Working for an umbrella company makes no difference to this.
If you move from contract to contract with different
employers (as most temps do) each one would constitute a
single site for the duration of the contract and thus
travelling expenses would be for the normal commute. Only if
the contract was with the same employer (by this we mean the
end user/client and not the agency or umbrella) and on
multiple sites (say for example, an accountancy firm who
asked the individual to attend several different client
sites to do audits) would expenses to those sites
potentially be allowable business expenses.
But
in this scenario, this applies whether the employer is the
agency, the end user or the umbrella. The presence of the
umbrella itself has no bearing on this.
No
doubt advocates of the umbrella companies will disagree.
They will say that the umbrella company is the contractor
and the temporary worker is an ‘operative’ of theirs, who is
sent along to their client site. They will say they are like
the accountancy firm in the above example and thus the
employment is with them. They will say the end user the
temporary worker works for, is like the client site the
auditor visits (and thus it is permissible to claim
travelling expenses to and from the location). However,
there is a crucial difference. In the example, the
individual is plainly an employee of the accountancy firm
but the temporary worker is not (necessarily) the employee
of the umbrella.
The
law with regard to ‘who is the employer of a temporary
agency worker’ is extraordinarily complex. There is no
single test. Who pays the wages is one. Who supervises is
another. The presence of a reciprocal agreement between the
employer and employee, for the employer to provide paid work
and the employee to show up and do it is a third. For agency
workers in most circumstances some tests suggest they are
employees of the agency, others of the end user and some
cases have concluded they are employees of neither. Cases
that have reached the higher courts in recent years on this
point have gone various ways, always on the specific facts
of that case and the issue at hand.
For
tax purposes, yes, an umbrella can claim to be your
employer (as can an agency). But when it comes to
supervision, another essential in identifying an ‘employer’
you must ask yourself, would you really tolerate a
representative of that umbrella company or agency, picking
you up on your timekeeping, criticising your work, or
making decisions about your promotion or dismissal?
More
importantly, you must also ask yourself, is it really the
case that if you work for an umbrella they will keep you
gainfully employed working for its clients? What happens
when the client contract ends? Does the umbrella (or
agency) continue to pay you while you look for your next
contract? In the case of the umbrella does it have any
involvement in finding that new contract at all? If you
answer these questions honestly, it is plain that an
umbrella company is not employing you to work for it, at its
various client sites. It is at best a payroll vehicle for a
series of temporary jobs arranged by one or more agencies,
and at worst a tax avoidance device aimed primarily at
enriching itself.
It
is an unpalatable truth that in this country, whether you
like it or not, you have to pay income tax. Anyone who
claims they have found a way to not do so (and will let you
into the secret in return for some of your wages) should be
treated with great suspicion.
That
they will may well get away with doing so (given the
difficulty in proving the facts in these situations) hardly
justifies it. It is for the individual to decide if he or
she wants to avoid paying their tax simply because they may
well not get caught, rather than whether the avoidance is
legal. It’s a mute point in any case, as the tax
authorities, particularly following the merger of the Inland
Revenue with the Customs and Excise to form Her Majesty’s
Revenue and Customs, now have an even longer reach and
sharper teeth than they did before. There is no time limit
on how far back they can investigate.
And
of course if the umbrella goes bust (as one of the larger
ones did last year) it will be your income tax which will be
wrong and you that will be getting the demand from the tax
authorities for repayments.
Doubtless there are circumstances where these PAYE tax
avoidance schemes can be made to work, but these are few and
far between. Our point is this. In the vast majority
temporary agency workers, they don’t.
Prisma Recruitment Limited 2008.
UPDATE March 2009
At the end of 2008 the
Treasury issued a document entitled Tax relief and travel
expenses: Temporary worker and overarching employment
contracts - A summary of responses. This, as the title
implies, was a response to a consultation on this issue
earlier in the year. The conclusion was that while
there were 'widespread compliance problems in this area'
there was not a need for new legislation (on the basis that
it is not a lack or legislation but a failure to comply to
those laws that is the issue).
However, the Government
did reserve the right to return to the issue if the HMRC
were unable to enforce compliance.
UPDATE May 2010
Given that there is
still a serious compliance issue with umbrella companies and
that it is getting worse and not better, it would not be a
surprise if the new administration did revisit the issue.
Remedies discussed back in 2008 where, either take expenses
entirely out of the tax system (and thus see the end of
umbrella companies) or increase the penalties for non
compliance by making the agencies who are advocating,
promoting or even just condoning the use of umbrella
companies, directly liable for unpaid tax.
This is an expression of our opinion. It is not legal advice
and should not be read as such. Anyone who requires more
information should talk to an accountant, lawyer or the tax
authorities themselves.
