Article Date: 25/11/2008
The Chancellor has announced that it considers existing HMRC legislation on travel expenses to be strong enough to tackle non-compliance in the recruitment industry, i.e. those that abuse the tax regulations on travel expenses. The bodies representing umbrella companies claim the announcement as a victory, but reading between the lines HMRC have identified the biggest rule breakers, mentioning at least one of the largest employment agencies in the UK, deliberately employing all temporary workers under overarching contracts, so that tax relief on travel expenses can be claimed even if none are incurred.
HMRC has set up a task force and there will be a few shocks in store for contractors when they realise the truly dubious circumstances under which labour has been supplied in the past.
This is what the Treasury had to say in the consultation document issued in July 2008;
‘Umbrella companies and some employment agencies make use of overarching employment contracts which enable some temporary workers to gain tax relief for travel expenses not available to others working in similar circumstances. There is also evidence of widespread abuse of the travel expenses rules by these structures. Non-compliance and the use of these structures to pay less income tax and national insurance contributions (NICs) lead to a loss to the Exchequer, as well as further problems’
When a worker is not working his involvement with the umbrella company is dormant. When he is not at work there are no mutual obligations which would keep a contract alive, and there is abundant case law which states that, in this case, no global or overarching contract exists. The HMRC case against umbrella companies is based on the opinion, that claims by employment agencies and umbrella companies, that overarching contracts exist are false. That opinion certainly seems to be correct.
It is also doubtful that an employee of an umbrella company could be seen to be in continuous employment, as the requisite need for workers to be absent from work only on a temporary basis under s212(3)(b) Employment Rights Act 1996 cannot be met, because when an agency contract of work is finished, that’s an end of it.
When PAYE umbrella companies disappear, labour charges in the construction industry may rise slightly but bona fide labour supply companies will fill the gap, offering real employment rights, continuity and access to grants for training to construction workers.
While labour suppliers will save the Treasury a bundle when the brolly companies disappear, unlike the brollies, labour suppliers meet the compliancy and competence requirements under CDM regulations. So it may soon be PAYE Umbrella 0 – Construction Industry 1, and for once we may be able to thank the taxman for something.